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Tellabs, Inc. (NASDAQ:TLAB)

Annual Meeting of Stockholders

May 02, 2012 3:00 pm ET

Executives

George Stenitzer -

Michael J. Birck - Founder and Chairman of the Board

James M. Sheehan - Chief Administrative Officer, Executive Vice President, Secretary and General Counsel

Tom Scottino -

Hillary Hothan -

Linda Wells Kahangi - Former Director, Member of Audit & Ethics Committee and Member of Nominating & Governance Committee

William F. Souders - Former Director, Chairman of Compensation Committee and Member of Audit & Ethics Committee

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

Thomas P. Minichiello - Former Acting Chief Financial Officer, Chief Accounting Officer and Vice President of Finance

Unknown Executive -

George Stenitzer

Hello, and good afternoon. Welcome to the Tellabs annual meeting of stockholders. And I'd like to say good morning and good evening to those joining us by webcast from around the world. I'm George Stenitzer, Vice President of Marketing and Corporate Communications. I wanted to let you know that today's presentation will contain forward-looking statements. These statements are subject to risks and uncertainties and actual results might differ materially. 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. And reconciliations between the non-GAAP financial measures and the GAAP financial measures can be found on the tellabs.com website. Today, first we'll hear from our Chairman, Mike Birck, who will conduct the official business of the meeting, including voting on the reelection of directors Bo Hedfors, Michael E. Lavin and Jan H. Suwinski, as well as other matters before our shareholders. Next, we'll hear from our CEO and President, Rob Pullen, who will review Tellabs' financial results and strategy.

Let's talk about the questions and answers. We will welcome your questions and answers after the presentations, but it's important to hold your questions until the presentations are complete. If someone disrupts the meeting, we reserve the right to remove you from the meeting room. After these presentation, feel free to ask a question. If you want to ask a question, just come forward to the podium. When your turn comes, step up to the podium and speak into the mic so that everyone in the webcast can hear you well. Out of courtesy to other shareholders, we ask you to limit your questions to 3 minutes. There's a timer here on the podium 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 will read the question aloud so everyone can hear. We have a full agenda today. Without further ado, here's Mike Birck.

Michael J. Birck

Thank you, George, and good afternoon, folks. We're delighted to have you join us. And we'll try to give you some insights into what has happened last year, more recently this quarter and a little bit on what we think lies in store ahead. We'll share those thoughts with you and Rob will be the guy that starts that. The purpose of this meeting is to elect 3 directors, to approve on an advisory basis named executive officer compensation, to ratify the appointment of our independent registered auditor and to transact any other business that properly comes before this meeting. And of course, during the course of this meeting, we will talk about how we see things and what we're experiencing. Jim Sheehan, Secretary of the company will record the minutes of the meeting. I'd like first to introduce the members of our Board of Directors. One of whom is not here. And in fact, it's one of the guys who's up for reelection today, so we'll give him an excused absence. He's a schoolteacher, college professor, who is teaching the course today and couldn't be here.

I will identify the officers of the company as well as the directors. And as I do that, if the individual who's identified will stand and remain standing until we get everybody in that particular group introduced, then we'll -- then you can -- they can sit down. The current members of our board are Bo Hedfors, Frank Ianna, Linda Wells Kahangi, Mike Lavin, Dr. Stephanie Marshall, Bob Pullen -- Rob Pullen, Bill Souders, Jan Suwinski who is not here and Vince Tobkin. Thank you. I'd like also to introduce 2 new board members who will be joining officially joining the board immediately after this meeting and that's Vince Kelly and Greg Rossmann, and they are here as well. Thank you for joining us, gentlemen.

And just by way of introduction, they have been with us through the board meeting we just completed and yesterday and today and had some prior orientation to the company last week so they've been fire-hosed with a lot of information in the relatively recent future. The executive officer of the company in addition to myself and to Rob Pullen who you've already seen, are John Brots, Executive Vice President of Global Operations; Roger Heinz, Executive Vice Present of Global Sales and Service; Dan Kelly, Executive Vice President of Global Products; Rizwan Khan, Executive Vice President of Global Marketing; Tom Minichiello, Vice President Finance and Chief Accounting Officer; Dr. Vikram Saksena, Executive Vice President and Chief Technology Officer; and Jim Sheehan, Executive Vice President and Chief Administrative Officer and our General Counsel and Secretary, and then last but not least, our newest member of the officer corps, Andrew Szafran, who is Executive Vice President and Chief Financial Officer and who is completing, as somebody said earlier, his second or his third rather Wednesday of being a part of Tellabs. So we're delighted to have all of you guys here. Thank you.

Representing Ernst & Young, our independent registered auditor is Mary Quirzva [ph] and Martin Schneider. Gentlemen. They will have an opportunity to talk with you or answer any questions, if you have questions for them after we finished the informal part of this meeting.

The board fixed March 12 this year as the record date for determining shareholders entitled to vote at this meeting and the meeting is being held pursuant to an annual notice, a notice of annual meeting of stockholders which was sent on or about March 12 or March 6 to all stockholders of record as of March 12 the record date. Mr. Sheehan, do you have the appropriate affidavits to that affect?

James M. Sheehan

I do.

Michael J. Birck

Thank you. Will you make sure that a copy of the notice, the proxy statement and proxy card that was sent to all shareholders as well as affidavits of the meeting are filed with the appropriate authorities for this meeting?

James M. Sheehan

[indiscernible]

Michael J. Birck

Thank you. At the close of business on the record date which, as we mentioned, was April 6 -- I'm sorry April 12. There were 365,775,250 shares of common stock issued and outstanding. A copy of the list of registered shareholders or stockholders, I guess I should say, since we’re a Delaware Corporation. Eligible to vote at this meeting is available for inspection by any shareholder during the meeting or immediately after and it’s out in front. Next, I would like to appoint Hillary Hothan, Tom Scottino and Kathleen McCarthy [ph] as inspectors of elections. They're over there. They will ascertain and report on the number of shares represented at the meeting, count all the votes cast and report the results of the voting at the end of this meeting. Hillary, Tom and Kathleen would you do those things?

Tom Scottino

Yes, we will

Michael J. Birck

Thank you. All right. You're going to say something, Hillary?

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. Okay. So we have quorum and we can proceed with the meeting. I hereby declare that, that quorum is officially present and we'll tabulate the votes a little bit later. As the first order of business, a motion is in order to waive reading of the minutes of the company's 2011 annual meeting stockholders and to approve those minutes as written. A copy of those minutes is available for inspection by any stockholder out in front during the course of this meeting or immediately after. I would recognize Dalise Adakari [ph].

Unknown Shareholder

I so move.

Michael J. Birck

Thank you, Elise [ph]. I will now recognize Christine Rowen [ph].

Unknown Shareholder

I second the motion.

Michael J. Birck

Thank you. Well, those in favor of us not reading the minutes to you, please indicate by saying aye.

[Voting]

Michael J. Birck

Nobody wants to hear us do that I am sure. Thank you. Okay, in order to expedite the flow of business at this meeting, we will make -- we'll ask that motions being made and seconded for each matter to be acted upon as set forth in the proxy statement, which you have all received. The actual vote on each matter will be deferred or at least it won't be announced until all the matters have been acted upon and then those results will be announced by the inspectors of election. The company has 3 classes of directors. Each with staggered terms and with the members of each class serving for 3 years. At the annual meeting, the terms of Class II direct this annual meeting -- the terms of the Class II directors will expire. The 3 nominees for Class II directors are individuals who have served in that capacity here before are Bo Hedfors, Michael Lavin and Jan Suwinski. If elected, the 3 nominees will serve until the 2015 annual meeting of stockholders or until their respective successors have been duly elected and qualified. Stockholders are entitled to 1 vote for each share even though this is Chicago or close to Chicago. Shares cannot be voted for more than 3 nominees. The favorable vote of a plurality of the shares present and entitled to vote at this meeting will be necessary for a nominee to be elected to the board. Now let's proceed with the nominations. I recognized Tim Hubler [ph].

Unknown Shareholder

My name is Tim Hubler [ph]. As of the record date, I was a Tellabs stockholder and I nominate the following persons for election as Class II directors of the company. Bo Hedfors, Michael E. Lavin and Jan H. Suwinski.

Michael J. Birck

Thank you, Tim. And now recognize David Jenkins.

David Jenkins

My name is David Jenkins, as of the record date, I was a Tellabs stockholder and I second the nominations.

Michael J. Birck

Thank you, David. The nominations have now been made and seconded. No stockholder having previously notified the company of any other nominations, I declare the nominations closed.

We will now move to the second item to be voted on today, which is to approve on advisory basis named executive officer compensation. The company is asking its stockholders to approve on an advisory basis the compensation of the named executive officers. This proposal commonly known as a say-on-pay proposal gives the stockholders the opportunity to express their views on the named executive officers overall compensation as described in the company's proxy statement which you've all received. The say-on-pay vote is advisory and will provide the Board of Directors and compensation committee thereof with input from stockholders to consider for future actions regarding named executive officer compensation. I'd like to recognize Charlie Kennedy.

Charles Kennedy

My name is Charlie Kennedy As of the record date, I was a Tellabs stockholder. I moved to vote on the approval of the say-on-pay proposal.

Michael J. Birck

Thank you, Charlie. I'd now like to recognize Sandra Muer.

Sandra Muer

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

Michael J. Birck

Thank you. All right. Let's move to the last item on the -- to be voted on today's agenda, which is the ratification of Ernst & Young as the company's independent registered auditors. The company's Audit and Ethics Committee has selected Ernst & Young who has served in this capacity for quite some time now to act as the independent registered auditor for the company in 2012. We believe that it is appropriate to seek stockholder ratification of this appointment in light of the critical role played by the independent registered auditor and requests a motion for such ratification. I would like to recognize Kristine Stewart [ph].

Unknown Shareholder

My name Ms. Kristine Stewart [ph]. As of the record date, I was a Tellabs stockholder. I moved to ratify the appointment of Ernst & Young LLP as the company's independent registered auditor.

Michael J. Birck

Thank you, Kris [ph] And I'd like now to recognize Rich Tatara.

Rich Tatara

My name is Rich Tatara. As of the record date, I was a Tellabs stockholder. I second the motion.

Michael J. Birck

Thanks, Rich. Okay, a motion has been made and seconded to ratify the appointment of Ernst & Young as the company's independent registered auditor. The company has not received notice from any other stockholder or at any other -- or at any other matter -- of any other matter to be considered at today's annual meeting. And therefore, no other proposals may be properly introduced at this annual meeting by our stockholders. The polls will be open at this time.

We will now proceed to a vote on the previously discussed matters. If anyone here hasn't had a chance to vote or would like to change your vote, we will accommodate that. And if you would just raise hand, we'll have somebody bring a ballot to you and you can do an in person vote here. I don't see anybody that desires to do that, so we'll then -- pardon? Oh, we did have one, right here. That will put these people to work up here. Anybody else? Okay. It doesn't appear that we have anymore. The ballots will be now counted and announced a little bit later. While the results of the voting are being tabulated, I would like to ask our Chief Executive Officer, Rob Pullen, to join me. Rob will discuss briefly the 2011 financial results and the first -- and those of the first quarter for 2012. Rob and I will then take questions in accordance with procedure discussed at the beginning of the meeting that George went through. Detailed information concerning 2011 is presented in the company's annual report was distributed to all stockholders with the proxy materials for this meeting.

Before Rob begins, I'd like to acknowledge the contribution, however, of 2 fairly long-term directors that have been with this company for a long time and who are retiring at the conclusion of this meeting. Those are Linda Wells Kahangi which is -- who's right there. Linda, would you come up here, please? And Bill Souders. And Bill you might also come up here. Linda's been with us for 6 years now and Bill has been with us for more than 20. They are both excellent directors and people who have made a real contribution to this company. In recognition of that, I would like to present each with a little momento of their experience here at Tellabs. And Linda, we'll start with you. This is a -- this is something to remind you of the time that you spent on the road between the northern suburbs and here and we'll give you some comfort in knowing that you don't have to do that anymore. Thank you very much. Would you like us to send this to you or do you want to take it?

Linda Wells Kahangi

I do.

Michael J. Birck

You want to take it? Okay, you're on. Thank you for your help. Bill Souders has been, as I mentioned, a member of our board for over 20 years and I've known him for that length of time, of course, and maybe just a little bit longer than that. He has been a significant contributor to this company and he also has an avocation that he is pretty adept and that's playing golf. He routinely shoots his age and that's something that not very many of us here can ever aspire to.

William F. Souders

It’s gotten a lot easier.

Michael J. Birck

Well, yes. I’m going to have to get about 100 years old before I can get there. Bill, we'd like to give you a little something to remind you of Tellabs and that's a golf -- a traveled bag for golf because we know you're going to be in Florida. I know you don't want to take this with you.

William F. Souders

You're right.

Michael J. Birck

And we'll ship it to you. But this is -- this would allow you to take your golf clubs wherever you go.

William F. Souders

Michael, it's been an honor and pleasure, you know that. And the best luck to you and Tellabs.

Michael J. Birck

Well, thanks very much, Bill. You've been a big part of Tellabs. We will definitely miss these 2 folks and they have been a part of this company, a vital part of it for a long time. So thank you, Bill. Thank you, Linda. We hope our paths cross again many times. And I have a feeling they just might. Okay. Let's now turn to business at hand and part of that has to do with finding out what's going on with the company. Let's turn to Rob to get that information.

Robert W. Pullen

We report the results in the second half. We don't do it.

Michael J. Birck

Okay. You're on.

Robert W. Pullen

Thanks, Mike, and hello, everyone. Good morning, good evening for those of you listening on the webcast and good afternoon for those of you who are here in front of us. We believe that we wanted to give you an overview of where we've been and what we've been doing as well as what we believe the future can be. And so we wanted to give you objective balance view as shareholders where we've been and where we're going. And without further ado, I'll do that.

If you look at Tellabs, last year at this time, we forecasted to all of you that 2011 would be a transition year. That was going to be both in technology and in marketplace. And unfortunately, all that came true. And you ask yourself a question why? Well, I'm going to give you some timelines here of 2008 to 2012 of some of the things that have happened under this management team as well as give you forecast of things to come.

But first, a little bit on the macroeconomic industry. As most of you know, the North America just lived through one of its worst recessions since the depression. Western Europe is likely headed for the same environment right now with recession. That has plagued us. It's affected our customer capital expenditures. Our customers are consolidating around the world, and as a result, have more purchasing power. There are many, many competitors in the world. We compete with start-up companies and giants in the world. Some of those giants are subsidized by their federal government and are considered state-owned agents -- state-owned companies that compete against us and get benefits from those organizations. We compete against all of them. And when you look at us over since the 2008 time frame, this management team, what we did was we said, "Hey, our access business is unprofitable, let's move that to profitability." We've reduced some of our expenses there, and we've move this whole product line towards profitability. At the same time, we said that is a management team, we are going to invest where most of the capital expenditures were throughout the world. And that was going to be outside of North America, which is indeed is proven true when you look at the fourth quarter and the first quarter, North America slowed down a lot.

Now, we invested outside of North America some of that is paying off right now. Our revenue outside of North America, I'll touch on a little bit later, is up 27% from 2010 until 2011. In about the 2009 time frame, we made a big bet. We went and we bet on acquiring a company called WiChorus to get into a new space. And that, that was a risky bet. We all knew it. What happened to us, though, is just as we were starting to make progress on that risky bet, we lost some business from one of our top North American customers that reduced our revenue, our profitability and it minimized our ability to invest in all 3 areas we are investing in. I'll come to it later, packet optical, mobile backhaul and the WiChorus acquisition which was packet core. So we did that in around the 2009, 2010 time frame and some of our revenue peaked. I'll show you some comparisons of the data here in the moment.

In 2011, we had to make a tough decision which was with our revenue down and our profitability down, we had to make some tough choices and that's indeed what we did. We cut expenses in the acquisition that we did. Now there is some macroeconomic events, there are big competitors that try to squeeze us out of this acquisition. And in all candor, we had some execution problems that we had as well. And as a result, we made a decision at the end of 2011 to cut our expenses. We did that in January in the -- towards the end of the month of January and we cut our expenses. All told, we've now as an organization, have cut out close to $200 million of our expenses since 2008 and unfortunately, that's been at the expense of roughly 1,000 people. Now what does that mean? It means that with the exception of this one customer in North America, we're up 9% year-over-year. Our business outside of North America is up 27% year-over-year but more importantly, Tellabs is now on a path towards profitability. And I'll give you more of that insight here in a moment.

Now one of the things that we've done, well, we had some highlights here, we do business with 40 of the top 50 global service providers. In the past, we haven't done that. In my earlier years at Tellabs, we only did business with the Tier 1 operators in North America. We now are doing business with Tier 1 and Tier 2 all over the world. So that’s 80% of the top service providers in the world. We're doing business with the who's who. We invested in Russia a few years ago and it's paying off. We're now doing business with one of top wireless operators, MTS and MegaFon, just as an example. We invested in this new next-generation wireless technology, NetCom, in Scandinavia picked us. We're doing business with Nippon Telephone and Telegraph in Japan. We do business with Vodafone now all over the world and they have been close to a 10% customer both in the fourth quarter, they were a 10% customer, and in the first quarter, close to a 10% customer.

We're also now doing business with the U.S. federal government through big systems integrators like General Dynamics. Now how do we compare 2010 and 2011? 2011 was not a good year for us, period. Our revenue went down, our earnings per share went down as you can see the numbers and our cash from operations went down. We're investing, including in the 3 different areas. We just made a tough decision to change that. And so we were generating losses in 2011 and we all believe that, that was intolerable to our shareholders over time. We gave the shareholders on our recent earnings call, this past week, update on where we are with our first quarter of 2012 results.

Our revenue was in the low-end of guidance around $258 million. Our gross margin was around 37% on a GAAP basis, a little bit higher on non-GAAP basis. Our operating expense fell from $130 million, down to about $120 million and there's more to come. Our operating expenses will be -- when you look out towards the end of 2012, down closer towards $110 million if not slightly lower in operating expense.

On a GAAP basis, we had a loss of 38% a share in the quarter and non-GAAP about $0.04 a share. We had some highlights, however. And so those are the lowlights, I said, because the macro environment as well as some of our execution. We have some highlights, however. We added many new customers in this past quarter. We added 3 new customers in our mobile backhaul space and 3 new customers in our optical space. Two of those customers where Vodafone in Hungary. We're doing a lot of business with Vodafone but now it's expanding in different areas throughout the world. And that was from mobile backhaul.

The other carrier one of the 6 new customers that we talked in first quarter was vitroconnect in Germany. They deployed fiber out to people's homes and they're using our optical networking products as all the backbone. We also ship a product that we use in our mobile backhaul, which is really connecting radio towers, your handheld devices, your phones, go up wirelessly to a radio tower. That radio tower typically is interconnected with some medium back to some hubbing point to connect to the rest of the world. We make all that mobile backhaul equipment to go from the radio tower to that hubbing point. The 8800 is part of that solution.

In the first quarter, we wound up shipping our $1 billion worth of that product since we started day one. And in 2008, when we first started our -- this endeavor, roughly 75% to 80% of revenue was from North America, 20% to 25% was outside of North America. Again, now for 4 quarters in a row, we have revenue outside of North America at roughly 51% of our total sales which is good. We're diversifying our customer base on a global basis, and we're expanding following the capital expenditure.

When we look towards second quarter, we said, okay, first quarter was rough, last year was rough, but we believe in what we're doing. And we have some positive signs to go with that. I gave you some positive data just a moment ago. Our book-to-bill ratio, which is orders that we're taking in was higher than the amount of shipments we put out. That's a good sign so our book-to-bill ratio was above 1. That ratio was above 1. What that did was allowed the management team to forecast an increase in revenue from the $258 million in the first quarter to a range of $280 million to about $305 million is what we told the outside world. And furthermore, our gross margins would increase and be up from the 37% so our profitability would increase to 40% plus or minus a point or 2. Also a positive trend and a positive sign. And if we executed on this plan, notwithstanding the first quarter and all of the past 2011, which we can answer any of your questions about, we believe that our revenue would increase, our profitability would increase and we would be positive in cash flow. And that's our goal so we have to execute on this. We need a little help from the macroeconomic environment as well as Tellabs execution and we all plan to continue to do that.

And so what's our strategy going forward and why are we thinking what we're thinking? So first, it's all about and we talked about this over the past couple of years, it's all about mobile traffic growth. We believe the world is transitioning to wireless devices whether it's your iPhone, whether it's your iPad or any other derivative that come out now from Google, Samsung and there's going to be a myriad of other devices. We also believe that all of that is human-to-human communication or human-to-machine communication. We believe that there's a big machine-to-machine market that's going to happen over the next 10 or 20 years where it's device to device is going to communicate with one another. It's already started happening. Here even in this community in Naperville, we have remote meter reading where it's now wireless communication. You may like it or not but it's a trend that's happening in the world and there's no stopping it. And so the world is moving from an investment of wireline traffic into wireless traffic, all to handle this data growth.

The data growth is all based on people using these devices. And by the way, it may not be the generation that I live in that's using it even though I consume a ton of information using my handheld devices, but it's going to be the kids. It's the teenagers and the kids that are going to continue that proliferation. And it's going to be corporations that do the machine-to-machine interconnect and we plan to play a role in that. But here's what I mean. It means that there's going to be lots of traffic growth over time. The graph that’s sitting behind me is showing traffic growth in data over time to the year roughly 2015. And what's notable there is this, a lot of the growth is video. It's not going to be human voice, it's not going to be texting, it's not going to be email, it's going to be video traffic. The video traffic is booming and it's in petabytes of information. Petabytes for those of you who maybe forgot some of the detail in your math, it's 10 to the 15 amount of information so 10 multiplied 15x. Traffic is growing exponentially. We plan to participate with that.

So what do we do? We said let's minimize -- we made a bet in packet core. It didn't work out, macroeconomic events, competitive events as well as our execution. So we said, we're going to focus in a few different areas. We're going to focus in this optical transport business, we call packet optical because we integrate the 2 technologies. I won't burden you with all the detail. Mobile backhaul using data technology to link the radio towers to hubbing points to connect to the rest of the world and our professional services, where our customers are asking us to help them architect, design and optimize their networks and Roger Heinz who runs sales and service is focusing on that area. Dan Kelly who's running our product line is focusing on the packet optical growth as well as the mobile backhaul growth.

We also invest in fast-growing geographies. They paid off. They are in Brazil, Russia and South Africa, for example. All of these areas that we told you we're going to invest in, they’re all now meaningful revenue for Tellabs, very meaningful both revenue and profitability coming from these region. The management team has even more aspiration in 2012 to invest in other areas, in other geographies because that's where the capital expenditures are. We're following the money. I'm not going to disclose that for competitive reasons, but they're in emerging markets now around the world beyond these particular areas.

When you look at our just high level of focus on mobile backhaul and packet optical, there's glue that puts it all together that helps differentiate Tellabs. It's our 8000 Network-management system. We're one of the few companies in the world probably beside Alcatel-Lucent at this stage that does both optical and data routing all managed by one network-management system. It helps to differentiate our products and our technology.

I put the part numbers up there for all of you to look at. I'm not going to get into it and bore you with all those details but we have a family of product that competes in these areas to go deliver, transport or getting information from point a to point b, linking all this mobile data traffic and the growth associated with all of the mobile data information including all the mobile video information. Why did we pick these markets? Well, they're going faster than the overall capital expenditures of our customers. Take the mobile backhaul application. A market that we addressed is about a USD $2 billion per year industry this year. It's growing in about 9% compound annual growth rate. We aspire to be in the top 2 by 2014 in this space, and we're 2 or 3 right now and we want to build on that.

Why do we think we can compete, what are our areas of differentiation? Well, we have proven leadership. We're in 160 networks today and we have good partners with companies like Ericsson. They help us -- they're both competitors and collaborators with us. In this case, they're collaborators with us. They helped distribute our products instead of their own to augment their end-to-end solution. We're, I'm going to call it LTE ready or long-term evolution ready, don't worry about the acronym. Most of the wireless today is I'm going to call it third generation, let's call it current speed. The world is moving towards higher speed or a long-term evolution, some people called fourth generation. Verizon is probably the most advanced in the world right now with their ubiquity of higher-speed wireless rollout. Our products are capable of migrating in that space and we've already sold to customers in this next generation technology. We need to continue that. We have deployment flexibility. It's hard to see on the left-hand side of this chart but we make a series of products that are optimized for each one of the locations in our customer networks. They are -- there's something that's fit out of the radio site. It's a small little pizza box type system, which is one of those narrow systems over here. We sell in the aggregation nodes and the hubbing nodes which are more scalable, higher capacity systems and we sell into these areas as well. So our deployment flexibility allows us to compete, including with state-owned enterprise that have an unfair advantage over us.

Next, we handled current technology and this next-generation technology. And lastly, in this new world, the world has changed from voice communications that we knew 20 years ago of communicating over wirelines. It's all converted now to wireless, optical and the Internet protocol technology. We actually took all of our know-how on the existing generation and applied all the operation to this new technology. It helps differentiate us.

So what do customers vote? How did they vote? Well, we gave you an example here in this particular chart of saying, proven market leaders, VodaCom in South Africa, Telecom Italia in Latin America. It sounds funny Telecom Italia in Latin America but Telecom Italia out of Italy owns some properties in Latin America that it bought from us. We also sell the Telecom Italia in Italy but they bought our technology based on our leadership of -- in the space. 2 companies Telstra and Netcom, out of Australia and Scandinavia, respectively, are buying because we know how to move into the next generation of higher-speed wireless. From deployment flexibility from low entry cost, low scale nodes to a little bit higher entry costs, higher scale nodes. Companies like Global Village Telecom or GVT in Latin America, in this case in Brazil bought our equipment. Because of the capabilities to handle the current technology and migrate to the new technology, MTS in Russia, one of the biggest wireless operators in Russia bought our mobile backhaul. And then lastly, because of all of our operations and capabilities that we have from doing wireless networks for close to 30 years, companies like Vodafone bought our equipment in one country and are now expanding to many countries.

We're also making continued investments. Dan Kelly and his team continue to make investments all with the goal of unifying our solution. He just made organization changes to put all of our data products under one individual. We're coming out with higher capacity. We just released higher density and lower cost to go keep our margins up and compete with the rest of the world, including our competitors and we continue to add new customers. By the way, most of our customers, the ones that we have the 160 customers we have around the world, they're saying, "Hey, we're going to migrate to this next generation high-speed technology. And, Tellabs, if you deliver your stuff, we'll migrate with you if you continue to deliver on this roadmap."

Now the packet optical. It's a very crowded space in the world, highly competitive as well. All of these spaces are. We're trying to address a niche or a focus area of -- in the metro market or I'm going to call it shorter distances, all with the goal of helping our customers generate revenue and save expense. The market that we address here is about a $2 billion industry, it's growing at about 13% compound annual growth rate. We have differentiation here as well. Customers buy our product because we have some of the highest density, meaning the most circuits for 10-gigabit capabilities today. 10 gigabits for those of you who are not following all the detail math is a thing that's operating at 10 billion times per second. It's operating at really high speed. We have deployment flexibility in our optical technology where we have low-entry price product where we're helping our customers deliver and generate new revenue to businesses throughout the world.

We've been quietly here in North America is one example. We now deliver service with our packet optical technology to 10 of the top Fortune 50 companies in the world. We help our customers like Verizon and like CenturyLink sell it to the businesses in the world, that's paying off. We also did something unique. We integrated not only the optical technology but this new next-generation technology of Ethernet and packet that helps differentiate us. We also have resiliency and restoration. We sell into Chile, for example, where there's earthquakes. They have fiber cuts in multiple locations at the same time. Our equipment helps them restore that close to instantaneously.

Same thing in India. I was just in India and they have hundreds of fiber cuts per day. People -- there was a lot of construction going on in India, backhoes digging stuff up and people stealing the fiber thinking it's copper that they want to go sell. And so they have all these problems and they use our equipment for network resiliency. And then like in the mobile backhaul space, our end-to-end management system continues to be positive. We have the same examples here, frontier communications who is becoming far more relevant in North America and going to try and compete with Verizon -- the 2 big giants, Verizon, AT&T has bought our packet optical equipment because of our high-density.

CenturyLink and Verizon have bought our equipment for deployment mass technology and for helping them sell to enterprises throughout the world. Smaller companies have said, we really like the integration of the optical and the packet technology. So on a one platform, we can deliver all services and help us generate revenue and save capital expenditures versus what we're currently doing. They also like Vodafone and as well as Claro in -- well, Vodafone is all over the world. Claro's in Brazil. They buy us for network resiliency as well, and then the management both GVT and Brazil and Vodacom in South Africa. I was just in South Africa earlier part of this year and they said, "Rob, we buy everything from you because your management system makes it really easy to provision." In fact, we can provision circuits 5x faster with your equipment than any other network management system in the industry. So these are just some examples.

The same holds true Dan is continuing to release technology, again, with more scale that reduces cost to improve our either competitiveness or improved our profitability, both of which need to occur. We have new enhancements for -- enhancements and restoration and resiliency. We have new enhancements to help our customers deliver to the Fortune and expand from the Fortune 50 to the Fortune 2000. And we now I said 10, we serve 11 of the top Fortune 50 throughout the country.

The next area is professional services. In short, we've grown this business over several years from 0 to over $50 million which augments our services business in general. Our services business is slightly over $200 million a year. It's profitable and we continue to pursue that, and we started getting into what we call professional services but it's dominantly consulting services. This is customer saying, hey, you know this new technology, I really don't know it too well. Will you help me architect, design and optimize the network. That's what we're doing. We just introduced a new product in our professional services called Insight Analytics. Insight Analytics goes into network operator. In this case, we've already gone into a Tier 1 operator in Europe demonstrate a proof of concept to them and said, hey, we can help you optimize your network and troubleshoot it faster than you currently are. Today, it takes you about 2 or 3 days to troubleshoot a network. We can do it in 2 mouse clicks. They said "well, if you can prove it to us, we'll buy it." So we went in proof of concept. We did it, we've proved it. And we expect revenue towards the end of this year from this particular new professional services and obviously, we plan to expand that in summary.

We're focused on markets that are growing faster than the overall capital expenditures in the world, mobile backhaul, packet optical and pro services. We’ve made tough decisions on expenses and product lines to get -- to cut out product lines who are going to be less successful or odds of success and profitability were not as great. We are moving towards profitability as a company right now. We believe that the decisions that we made here in January, will move us towards profitability. If we execute here in the second quarter and come in the range that we said in revenue and margin and our operations expense, we should be profitable on a non-GAAP earnings basis as well as on a cash flow basis, and we expect that cash flow to be positive. We expect our customers to grow towards the second half of the year in their capital expenditures, but we don't have perfect information on that nor do our customers.

And so with that, I'll ask our Chairman, Mike Birck, to come back up as well as -- and now to answer any of your question that you may have either on history or what we're doing going forward, but we're in a path towards profitably while still investing for the future and trying to look out for our shareholders certainly in the mid and long-term. With that, George.

Question-and-Answer Session

George Stenitzer

So now we'll take your questions both in the room and on the webcast. If you want to ask a question in the room, please come forward to the microphone so everyone can hear you here and also on the webcast. Out of courtesy to other shareholders, we'd ask you to limit your questions to 3 minutes. There's a timer right here that will help you keep track. And if you have a follow-up question, we'd ask you to give other shareholders the opportunity to address their questions first. On the webcast, use the Q&A feature and I'll read the questions aloud here. With that, do we have any questions? I see one here. I'm going to take the microphone to you, Maury [ph]. Let me get that out of there.

Unknown Shareholder

My name is Maury Webster [ph] a longtime shareholder of Tellabs. Hello, Mark, Mike, I should have said. Again, this year your legal proxies did not come in time for the meeting. Not only yours but neither the Sears Holding this morning. I get hundreds of legal proxies and you just can't seem to get them on time and delivered properly by the mailman.

Robert W. Pullen

Do you want to take that?

Michael J. Birck

Yes, go ahead.

Robert W. Pullen

Did you hear that?

Michael J. Birck

No.

Robert W. Pullen

Jim, do you want to comment. I think the questions was can we get the proxy out earlier?

James M. Sheehan

Sure.

Robert W. Pullen

I'm sorry, Maury [ph].

Michael J. Birck

Maury [ph].

Robert W. Pullen

Maury, I'm sorry.

Unknown Shareholder

The legal proxy.

Robert W. Pullen

The legal proxy.

James M. Sheehan

We used the U.S. Postal Service to send out our proxies. We try to get them out as early as we can in the process. Shareholders that want to get them as quickly as possible one of the best ways to do that is to sign up for electronic delivery if you can. And then you will get them immediately when it’s issued. We can't really control how quickly they get to shareholders through the Postal Service.

Robert W. Pullen

I don't know if you heard that, but Jim's advice was if you really want the most timely information from us, it's through the electronic format through the web.

Unknown Shareholder

[indiscernible]

Robert W. Pullen

We'll take your feedback under advisement and we'll see what we can do to improve that. Jim, you and I need to...

George Stenitzer

Okay, we have another question here.

Unknown Shareholder

My name is Florence [ph], I've been a stockholder for many, many years, and I've watched the stock go down and down and down. You speak very well about it and got a lot of great ideas but what is the stock at today about $3.94? Why isn't it going up? But Tellabs has billions of dollars. Tellabs has more money than most companies. And I don't see where it's benefiting me as a stockholder. So I'm very unhappy about it.

Robert W. Pullen

I understand your point. Do you want me to take it?

Michael J. Birck

Yes, go ahead?

Robert W. Pullen

First of all, as you saw by our performance last year, it wasn't very good. In '09 and '10, we've made tough decisions and did stock price increase from the lows of -- in the low $3s to the mid- $9s. The stock price isn't improving right now because we performed terribly in 2011 in the first quarter. That's why we made the decisions we just made. We need to show top line revenue growth as well as profitability. Our goal was to stabilize the company and show profitability here in the short term, which is why we made those decisions while the management team is working on growth and how we grow our top line. We need both in order to execute against that.

Unknown Shareholder

[indiscernible]

Robert W. Pullen

It's in the high $3s, it's not very good. And by the way, the cash roughly $1 billion in cash, we're not getting much credit for that. And so no shareholder, no institutional investor is going to give us much credit for that. They value the cash. It's just the fixed amount and they're saying, "Show us your improved profitability and show us your growth," and that's what we intend to do.

Michael J. Birck

And with regard to cash, not only do we not get much credit for having that much cash, we don't get much return on it either. Everybody here who has a bank account knows that story. So it's the cash is handy to have in terms of providing comfort against ultimately bankruptcy if you want to think of the most drastic terms. But we have an obligation I think to you, our shareholders, to perform better than we have in the past 5 quarters. And I assure you the Board of Directors you met today, until just before this meeting is committed to doing that same thing. So it's a combination of a lot of problems in the industry, in the economy and in North America, in particular, we find the going pretty rough. But we're optimistic that that's going to change and we are, in the meantime, changing things within the company that slimmed-down and make sure that we can do what we need to do which includes profitability for the company no matter what the environment is. We can't guarantee that because you got to have revenue, as Rob says, you got to have that top line but the -- that's where the effort is being directed.

George Stenitzer

Could we take this question here?

Robert W. Pullen

Yes.

Unknown Shareholder

You addressed the markets you're investing in, and included 2 of the BRIC countries but not the I or the C? Could you address why those are not included as markets that you are heavily invested in?

Robert W. Pullen

Yes, the question was, we talk about the BRIC countries. And for those of you who don't follow this, it's BRIC is an acronym that stands for Brazil, Russia, India and China. I think the gentleman said, "hey, you don't address a couple of them which are the I and the C.” Which is India and China. We're actually there. We're investing there. We just haven't had a good result there yet. The marketplace is highly competitive with indigenous suppliers, for example, in China. We're go into compete in China and we're winning some business, but it's modest it's not by comparison to Brazil, Russia and South Africa. And we go into China and its indigenous suppliers where the Chinese federal government is helping the local incumbents and the carriers that are owned by the government as well are helping the indigenous suppliers. And so it's a far tougher competition and we need to continue to evaluate how much we plow back into India and China. For now, we're there. We're continuing to test whether we can blossom that in the growth but the margins are really challenged in both of these countries.

George Stenitzer

Okay, We'll take the next question here at the podium.

Unknown Shareholder

My name is James Star [ph], I'm a stockholder. And practically a neighbor of your headquarters building. In September, my wife and I moved into [indiscernible] well right across the [indiscernible] from that beautiful building. And I want ask a couple of questions about the headquarters building. I remember when it was put up. And I always thought it was a beautiful building. And just about the time, you got it finished. The crash came and the telephone companies weren’t buying equipment and Cisco Systems was in the same boat, they had build buildings and some of them just had to stand idle. And I'd like to ask, what percentage of the building are you presently using? Are you able to rent out other parts? Is it a drag on the company? I hope it's not because I like to see you succeed in it. It's a gorgeous building.

Robert W. Pullen

Yes, thanks, James. Do you want me...

Michael J. Birck

We're using about half of the building. The west half and we rent the eastern -- east half to a variety of companies but the place is filled -- we're not -- we don't have a lot of idle space but we occupy only half of it and we share the atrium and the food service and that sort of thing with the people who are leasing the rest of it. That helps a great deal because the cost of operating -- the building is paid for. We paid cash for the build back in...

Robert W. Pullen

Contract, in that perspective.

Michael J. Birck

The ‘90s and 2000 but obviously there's cost of operation and that cost is offset by the rental we receive for the eastern half of the building, east half of the building.

Unknown Shareholder

So it's not a drag on the company then?

Michael J. Birck

I'm sorry?

Unknown Shareholder

It's not a drag on the business...

Robert W. Pullen

It's not a drag on the company?

Michael J. Birck

Right, it's not a drag on the company.

Unknown Shareholder

Well, I'm glad to hear that.

Robert W. Pullen

Let me just add to Mike. Mike's right. First of all, we paid cash for it. In fact, I see a guy in the room that kind of led the original building structure of that -- our headquarters. Next, even though it wasn't a popular decision, people wanted to leave the Tellabs logo and only Tellabs in that building. The management team and the Board agreed that in a couple of years -- a couple of years ago, we would go lease that out, so it wouldn't be a drag on the company. And Mike just told you the outcome of that which is we now have -- the building is 100%, either occupied by Tellabs employees or leased out and so it's actually helping us to offset some of our expenses.

Unknown Shareholder

Well, I want to congratulate you on that. I think that's a wise use of the building. But I hope the day will soon come when you could fill it up.

Michael J. Birck

Thank you.

Robert W. Pullen

We hope so too.

George Stenitzer

I think we have another question back here, yes? Let's go here.

Unknown Shareholder

I am Jay Sheirs [ph], a stockholder. Last year's annual meeting there was a great deal of emphasis put on research and development. I don't remember the exact number but it was in the several hundred million dollars area that you are going to focus this year into R&D. Have you've been able to quantify the results of that effort. And if you have, how has it affected your top line, your revenues?

Robert W. Pullen

Good question. We haven't quantified it, dollar for dollar, what the return is. I did share with you that we are investing in 3 different -- 4 different areas: professional services, packet optical, mobile backhaul and the acquisition we did packet core. We made the tough decision to get out of the packet core after we did the acquisition in 2009, so we cut of those that R&D. We certainly didn't get the return that we wanted from that, but we did get great technology. We got 100-gigabit technology that we need in all of our products. We got new software architectures that we can add to our next-generation product. So we gained some benefit but nothing like the return we had hope for. That's kind of one way to answer your question. The other way is, our growth globally of 27% from '10 to '11 year-over-year outside of North America, is largely attributable to our investments in this packet optical and the backhaul space. If we didn't do that, we wouldn't be even in our top line today. While we aspire to grow that next year, we're still trying to figure that out. But we're trying to take our R&D dollars and invest for the future. My last point is, last year, at this time, we came here and told you, we're investing a lot in R&D. On a higher top line, it was about 26% or 27% as a percent of the top line, bigger top line in R&D. Our top line, unfortunately, is lower this year and we're now down to about 20% as a percent of the top line in the research and development and a skinny down portfolio. We're becoming more specialist in an area to be more focused attackers. Do you want to add?

Michael J. Birck

And I would just add, a 20% R&D burden is a lot. I mean it's consistent with the business we're in. Companies in this industry typically are spending that kind of money and except perhaps for the Giants. When Alcatel-Lucent or Huawei or Cisco spend 8% or 10% on R&D from a top line multibillion-dollar number, they have a lot of -- a lot of leeway. We don't have that top line flexibility. And so we're constrained to, as Rob said, 20%, roughly 20% now. We can spend a great deal of more than that if we had it, if we had and do it effectively.

Robert W. Pullen

And if we weren't concerned about profitability in the short term.

Michael J. Birck

Yes. But right now, we have to be mindful of the shareholders in the company as well as the kind of products that we produced. But we're competing with companies that spend 10x what we do in product development. We’ve tried to narrow our focus, as Rob said, we got out of the packet core area after a foray there, that cost us a fair amount of money simply because we felt not that it wasn't going to be a productive area, ultimately, for the business, but because we just couldn't afford it. We couldn't show a bottom line profit which is our intent and still spend the kind of money that we were in R&D. That's a challenge and it's going to be a challenge, I suspect, for the foreseeable future. But there is a way to do it, and I think we're closing in on that. Rob talked about downsizing. A lot of that downsizing came in the R&D or product development area. Those are tough cuts to make. But it is what it is and we have to deal with that.

Robert W. Pullen

And I shared some bright spots with you, which is we're investing in areas and they're growing both are happening at the same time, both net-net, the results are what they are. And for all of your benefit, even as a specialist in this industry versus we compete against both startups and giants, we need to compete on 3 attributes, innovation at a fair price with great customer service. That's Tellabs. When we do that and we focus, we win. And that's really where we are as a company right now. We're trying to increase our focus, put all our limited R&D into a more focused area so we can go win in the marketplace and have these investments pay off.

George Stenitzer

We received a question from the webcast. Why does Tellabs continue to hold Cisco stock on its balance sheet? How does this benefit shareholders?

Robert W. Pullen

You want to take that?

Michael J. Birck

Yes, I'll take that. In fact, maybe we ought to have one of our finance people answer it, but I'll say to start with -- Tom, you're going to be ready to answer that?

Thomas P. Minichiello

Sure, Michael.

Michael J. Birck

Okay, the reason we hold it is because we have a tax burden to deal with if we -- if we remove that from our -- if we don't hold those shares. Tom, do you want to talk about that?

Thomas P. Minichiello

Mike's right. There's a tax issue there. It's kind of a unique and somewhat complicated transaction but the first answer is we really don't hold shares. We have a corresponding loan for the exact equal amount of shares and they net each other out so net-net. We really don't own the shares. You got to look at both sides of the balance sheet to see the offsetting numbers. But the overall -- it remains on the balance sheet because we've got somewhat of a complex sort of tax rolling where as long as we continue to hold on to it, the cost of holding on to it is less than the return that we get on the amount. So as that continues and as the tax regulators continue to sort of bless the transaction, we continue to hold it. We do look at it on a regular basis and there may be some opportunity to wind off that transaction, incrementally, over time. But for the moment, it's actually beneficial for us to keep it.

Michael J. Birck

Thank you. I would just add that this is an artifact of an earlier acquisition. We didn't buy the stock in Cisco. We bought a company whose -- one of whose investments was in a company that was later acquired by Cisco. It's a way to fend off the IRS. That's basically what we're talking about.

George Stenitzer

I have another question on the webcast. Please explain why you're adding 2 new directors to Tellabs' Board of Directors?

Michael J. Birck

Okay. The 2 directors who we're adding are representatives of shareholders, big shareholders. And we were responsive to some concerns about our shareholders. You probably have some of those same concerns about our performance, our profitability, growth, all of those kind of things. And we felt that it was probably appropriate to add people, a couple of people to the board to represent the interests of those shareholders. And that's what they're here for. We only had one board meeting with them but I suggest to you that they are doing what they're supposed to do.

George Stenitzer

I see one more question here.

Unknown Shareholder

How have your recent losses change your thinking about buying back stock?

Robert W. Pullen

Go ahead, do you want to take it?

Unknown Executive

Well, first of all, our recent losses, we don't like, period. As a result, we made tough decisions to improve the profitability. Lastly, the board continues to evaluate what the right thing to do with our capital structure is whether it's buyback stock or dividend payments which, as you know, we did start a dividend payment which the board makes a decision on quarterly. But we're constantly evaluating buying back stock or what to do with "capital" in the company.

Unknown Shareholder

[indiscernible]

Robert W. Pullen

We currently are not buying back stock in any big volume, notwithstanding the board has approved some of that. What we do buy back is some stock under the offices of our 10b5-1 plan, which is really offsetting some of the taxes associated with what we need to do to retain our employees and pay them fairly. So no, is the short answer.

Michael J. Birck

And I might add is not because we don't think Tellabs stock is probably pretty good bargain right now, but we think that our shareholders are better served by us contemplating other uses for that cash and believe me, we do. Acquisitions would be one of those kind of things. And expanding our activities in certain areas might be another. So the cash is an important element for us. And we're mindful the shareholders believe that we ought to at some point, do something with that cash. And I assure you that we will. It's -- I'm not sure a stock buyback is the right mechanism at this stage. Maybe it is. We'll contemplate that. We talked about it this morning. I'm sure we will have further conversations.

George Stenitzer

Are there other questions in the room? That's it.

Michael J. Birck

Okay. Thanks, George. Thanks, everyone.

Robert W. Pullen

Thanks, everyone.

Michael J. Birck

Okay. Now it's time to proceed to the counting of the votes. And I think I didn't properly introduce these important people over here who are inspectors of elections. So feel free to hold them, Tom Scottino and Kathleen McCarthy [ph] are the 3 inspectors of elections and they are not bribable. Okay, Tom, would you report the results?

Tom Scottino

Yes. Mr. Chairman. On behalf of the inspectors of election, I wish to announce that each of the following nominees receives votes exceeding of plurality of the shares represented at this meeting: Bo Hedfors, Michael E. Lavin and Jan H. Suwinski.

Michael J. Birck

Thank you, Tom. I hereby declare then that each of the nominees has been elected a Class II Director of the company to serve until the year 2015 annual meeting or until their respective successors have been qualified and elected. Hillary, would you please report on the vote for the approval of the say-on-pay proposal?

Hillary Hothan

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

Michael J. Birck

Thank you, Hillary. And so I then announced that the say-on-pay proposal has been approved, acknowledging that it's advisory only. Tom, will you please report on the vote for the ratification of the appointment of our auditors? Representatives of which are sitting right over year.

Tom Scottino

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

Michael J. Birck

Thank you, Tom. And I then indicate that we have declared the ratification of our auditors. You guys have anything to say? They got nothing to say. Okay. Well, thank you for your service because they do an important job. I don't think we have any other business to come before this meeting. I very sincerely thank everyone for coming. I thank you for the questions which I thought were pretty insightful and I hope our answers were equally so. We definitely plan as we do every year, to do better this year than we did last. We didn't get off to a very good start, but we have, I think, an opportunity to make amends and do better in the remaining quarters of this year and you heard Rob talked about that. That is always our intention. This time, I think it's probably likely that we'll do better. So -- and we can't do a heck of a lot worse than we did in the first quarter. Thank you all for your attendance. We appreciate you coming here and we appreciate your questions and your interest and we hope you will come back again next year. Thank you. We are adjourned.

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