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Tellabs (NASDAQ:TLAB)

Q2 2012 Earnings Call

July 27, 2012 10:00 am ET

Executives

Tom Scottino

Michael J. Birck - Founder and Chairman of the Board

Daniel P. Kelly - Acting Chief Executive Officer and Acting President

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

Analysts

Michael Genovese - MKM Partners LLC, Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

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

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

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Alexander B. Henderson - Needham & Company, LLC, Research Division

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

Ehud Gelblum - Morgan Stanley, Research Division

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

Greg Mesniaeff - Maxim Group LLC, Research Division

Blair King - Avondale Partners, LLC, Research Division

Jim Suva - Citigroup Inc, Research Division

Tal Liani - BofA Merrill Lynch, Research Division

Amitabh Passi - UBS Investment Bank, 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 Second Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Tom Scottino, Senior Manager of Investor Relations. Thank you. Mr. Scottino, you may begin your conference.

Tom Scottino

Thank you, and good morning, everyone. With me today are Tellabs' Chairman, Michael Birck; our acting CEO and President, Dan Kelly; and our executive Vice President and CFO, Andrew Szafran. This morning, Mike will begin with a few remarks, Dan will review progress across our 4 operating segments and Andrew will cover the second quarter results and our guidance for the third quarter. After that, we'll open the floor to your questions. Before we do that, I want to say that if you have not seen the news release we issued yesterday after the market closed, you can access it at tellabs.com.

I'd also like to remind you that this presentation contains forward-looking statements about future results, performance and achievements, financial and otherwise. These statements reflect management's current expectations, estimates and assumptions. The forward-looking statements are not guarantees of future performance, and involve risks, uncertainties and other factors that may cause Tellabs' actual results, performance or achievements to be materially different. A discussion of the factors that may affect Tellabs' future results are contained in Tellabs' most recent SEC filings.

The forward-looking statements made in this presentation are being made as of the time and date of its live presentation. If the presentation is reviewed after the time and date of its live presentation, it may not contain current or accurate information. Tellabs disclaims any obligation to update or revise any forward-looking statement based on new information, future events or otherwise.

This presentation may also include some non-GAAP financial measures. Reconciliation between non-GAAP financial measures and GAAP financial measures can be found at tellabs.com and in our SEC filings.

At this time, I'll turn the call over to Mike.

Michael J. Birck

Good morning, folks. You haven't heard from me on one of these quarterly investor calls for quite some time. The reason for my presence this morning is a sad one, undoubtedly known to all of you. Early this month, our CEO, Rob Pullen, lost his battle with colon cancer. This is a sad time for Tellabs as we deal with the consequences of Rob's passing and the challenges of a troubled industry.

First, my personal thanks towards everyone who called or wrote to express sorrow at Rob's death. I know that many of you knew Rob personally and are as saddened as we at this turn of events. But we must go forward and there is much work to do. Tellabs' Board of Directors, together with the executive team, is focusing on the future and on our customers and stockholders.

The board has appointed a CEO search committee, which I am chairing. Meanwhile, the board is confident that the current executive team will continue to lead us forward as we take on the undeniable challenges of the current telecom environment. This team knows the business, they know and help develop our strategy and they know our customers. The board has asked Dan Kelly, who I know most of you know, to serve as acting CEO and President. Dan and Rob joined Tellabs in the same year. Dan has been a part of Tellabs for 28 years in increasingly responsible roles, most recently as EVP for Global Products, with responsibility for our R&D activities worldwide. The board is confident that Dan and the executive team will more than just hold the fort and that they have what it takes to move this company forward.

Now I'd like to turn this call over to Dan and Andrew for an overview of the second quarter and answer any questions you may have.

Daniel P. Kelly

Thanks, Mike. I appreciate your support and the support of the entire Tellabs' board. I would like acknowledge how much we miss our colleague and friend, Rob Pullen. Rob taught us a lot and he made major contributions at Tellabs and in our industry over the past 28 years. Now we are moving forward, focusing on helping our customers succeed and improving our profitability.

We made good progress in the second quarter. Despite the economic challenges in Europe and elsewhere, we were able to generate $32 million in cash from operations in the quarter. Tellabs' revenue grew 12% on a sequential basis and we produced non-GAAP net earnings of $0.02 a share.

Tellabs continues to execute our vision and strategy with the focus on Mobile Backhaul, Packet Optical and Professional Services solutions. We recently reorganized our research and development teams and announced a change in the segments that reflect the way we run the business. We're working closely with our customers in these markets to create the solutions and products they need to succeed now and into the future. Each of these markets is growing faster than our customers' overall capital expenditures.

Now I'd like to review our progress in Packet Optical, Mobile Backhaul, access and Professional Services. In Packet Optical, we're seeing good customer uptake for new features on the Tellabs 7100 Packet Optical platform. Sales of the packet switching modules increased, marking Tellabs' best quarter ever for packet switching. Our packet switching module can cut capital expenses up to 60% compared with traditional DWDM, plus router architectures.

Sales of Tellabs' 40G transponders tripled compared with the first quarter, marking our best quarter ever for 40-gig transponders. We've been testing our new 100-gig transponder with multiple customers. We're preparing for 100-gig customer trials and deployments in the second half of this year.

We announced a distribution agreement with NEC Networks & System Integration for the Tellabs 7100 Packet Optical system in Japan. During the quarter, we added 4 new optical customers in North America and Europe. We also announced Banco Mercantil do Brasil as a new Tellabs 7100 enterprise customer.

In Mobile Backhaul, we shipped our enhanced Tellabs 8611 routers under controlled introduction in May as scheduled. Our new Tellabs 8600 system release provides 5x the capacity of the existing systems and it's easy for customers to make an in-service upgrade. Our customers can lower their capital expenditures in Ethernet Mobile Backhaul networks by up to 80% with this new release. Multiple customers are testing this release now.

In all, Tellabs serves more than 160 Mobile Backhaul customers around the world who are operating 2G, 3G and LTE networks. During the quarter, we added one new Mobile Backhaul customer. We also announced new business with Agile Networks in the U.S.

In access, we're selling Tellabs optical LAN solution to enterprise and government customers in North America. Tellabs optical LAN replaces traditional Ethernet LAN, dramatically cutting capital expense, energy consumption and space needs. During the quarter, we added 2 new enterprise customers for Tellabs Optical LAN solution.

In Professional Services, we booked our first order for our new Tellabs insight analytics service with a Tier 1 mobile operator in Europe. We expect to recognize revenue from this customer later this year. Tellabs insight analytic services enable customers to identify root causes of network and user problems much more quickly than before. Instead of hunting for root cause that can take up to 48 hours, now customers can find it in a couple of clicks. Customers also gain new visibility of network behavior patterns over time. That visibility enables our customers to do a better job of network planning and problem resolution. We're now shipping our latest software release, System Release 4.0, for the Tellabs 8000 Intelligent Network Manager. It's used by customers in about 200 networks around the world, and we've already shipped this release to more than half of our Intelligent Network Manager customers. Our new release adds built-in functionality for troubleshooting and provisioning in LTE and LTE advanced networks, as well as in Packet Optical networks.

To sum up, in the second quarter, Tellabs improved our profitability. Profitability remains our focus, while innovating new solutions to help our customers succeed.

Now to give you more details on Tellabs' second quarter results, here's Tellabs CFO, Andrew Szafran.

Andrew B. Szafran

Thanks, Dan, and good morning, everyone. Looking at the second quarter, I'd like to give you a little context before jumping into the results. Revenue increased in all 4 operating segments on a sequential basis. From a geographic perspective, we saw revenue grow both within and outside North America. Our strategy to focus on Packet Optical, Mobile Backhaul and Professional Services, while reducing investment in other areas, enabled us to significantly reduce non-GAAP operating expenses and improve non-GAAP net income by $21 million compared with the first quarter.

We generated $32 million in cash from operations in the quarter. We expect to be profitable on a non-GAAP basis and generate positive cash from operations again in the third quarter. Let's take a look at the second quarter numbers on a sequential basis.

Revenue in the second quarter was $288 million, up 12% from $258 million in the first quarter. As we announced in yesterday's press release, we began this quarter to report results in 4 operating segments: Optical, data, access and services. We recently reorganized our business to improve our strategic focus and execution, so we changed our reporting segments to lineup with the new organization. Complete descriptions of each segment, along with previously reported financial results reflecting the new segment arrangement, are contained in the press release. Revenue from all 4 segments grew in the second quarter compared with the first.

On a geographic basis, revenue from customers outside North America was $150 million in the second quarter, up 14% from $131 million in the prior quarter. Sequential revenue growth in the EMEA and Asia-Pac regions more than offset lower revenue in Latin America. All told, customers outside North America accounted for 52% of our second quarter revenue. Revenue from customers in North America was $138 million in the second quarter, that's a 9% increase from $127 million in the first quarter. North American customers accounted for 48% of total revenue in the quarter.

On a GAAP basis, we reported net loss of $5 million, or $0.01 per share, in the second quarter. That's a real improvement compared with a net loss of $140 million, or $0.38 per share, in the prior quarter. As you may recall, we incurred a $106 million restructuring charge in Q1 related largely to the closing of our packet core business. On a non-GAAP basis, net earnings in the second quarter were $6 million, or $0.02 per share, up from a net loss of $15 million, or $0.04 per share in Q1.

Now let's take a look at the segment data on a sequential basis. Optical revenue was $122 million in the second quarter, up 17% from the first quarter. Within this segment, solid revenue growth from the Tellabs 7100 optical networking systems more than offset expected declines in later life cycle products. Optical profit was $29 million in 2Q, essentially double the first quarter level. The increase in segment profit was driven primarily by favorable product mix within the Tellabs 7100 optical networking systems.

Data revenue grew 12% to $78 million in the second quarter. Increased revenue from the Tellabs 8600 Managed Edge System more than offset expected declines in later life cycle products.

Data profit was $5 million in the second quarter compared with a loss of $5 million in the first quarter of the year. The return to segment profitability was driven primarily by higher revenue and increased profitability from Managed Edge Systems and lower R&D expense related to stopping new development on the packet core platform.

Revenue in the access segment was $37 million in the second quarter, up about 4% from the prior quarter. Access profit at $6 million was essentially flat with 1Q.

Services revenue was $51 million in the second quarter, up 5% from the prior quarter. At $17 million, Services profit was up about 13% from the first quarter.

Now turning to gross margin. Non-GAAP gross margin was 39.9% in the second quarter, up from 37.4% in Q1. Gross margin is highly dependent on product and customer mix. Contributing to the improvement this quarter, we saw the following: About 2 points of improvement driven by favorable product mix shifts within the optical segment and about 1.5 points of improvement from the high level of data segment revenue, partially offset by other mix shifts within the quarter.

Turning now to operating expenses. Better control of expenses, along with our focus on optical and data products, enabled us to continue to reduce non-GAAP operating expenses on a sequential basis. Our non-GAAP OpEx came in at $106 million in the second quarter, better than the first quarter and ahead of our stated goal to reach $110 million by year end. Non-GAAP R&D expenses were $57 million in the second quarter, down from $65 million in the first quarter. Non-GAAP SG&A expenses were $49 million in the second quarter, down from $55 million in the first quarter of the year.

Other income was $500,000 in the second quarter compared with $800,000 in Q1. Our non-GAAP tax rate of 32% resulted in a $3 million tax expense.

Looking at the balance sheet, we made real progress managing working capital. Our AR balance declined by $23 million. Inventory turns were 5.0 in the second quarter compared with 4.2 in Q1. At the end of the quarter, inventory was $124 million, an improvement from $133 million in Q1.

Capital expenditures were $5 million in the second quarter consistent with the level of the first quarter. We also returned about $7 million to shareholders via our cash dividend. As I mentioned at the top of the call, we generated $32 million in cash from operations in Q2. Our overall cash and investments balance at the end of the second quarter totaled $938 million, up $4 million from the prior quarter.

There was no open market stock buyback during the second quarter. The actual number of shares outstanding at the end of the quarter was about 367 million. Employment at the end of 2Q stood at approximately 2,650, consistent with the end of the first quarter. The book-to-bill ratio was greater than 1 for the second quarter.

Now turning to our outlook for the third quarter of the year. Based on our bookings trend, backlog and mindful of current market conditions and uncertainty in Europe and the rest of the world, we expect third quarter revenue to be in the range between $260 million and $290 million. We expect non-GAAP gross margin to be about 40% plus or minus 1 point or 2 depending on the mix. And we also expect non-GAAP OpEx in the third quarter to be flat with Q2. In addition, we expect our non-GAAP tax rate to continue at 32%.

In conclusion, we're encouraged by our improved performance in the second quarter. We believe that aligning our operating segments with our focus on optical products for metro networks, data products for Mobile Backhaul and Professional Services will enable us to better tie operating results to our strategy. And while we are cautious concerning our customer spending in North America and around the world, as well as the overall economic situation in Europe, we expect to remain profitable on a non-GAAP basis in Q3 and generate positive cash from operations.

Operator, now we'll open the floor to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Michael Genovese with MKM Partners.

Michael Genovese - MKM Partners LLC, Research Division

So, guys, can I ask you about your outlook for the second half of the year, CapEx, what you're thinking about there. I mean, you're guiding the third quarter down sequentially. A lot of people think spending will be up in the second half of the year. I'd like to get your view on that and if there's anything we should read into early fourth quarter expectations based on that analysis.

Daniel P. Kelly

Okay. I'll take that one, Michael, and thank you for question. Just to repeat the question, the real questions is around the outlook for CapEx in the second half of the year. We are guiding slightly down in the $260 million to $290 million range for the third quarter. We do have concerns. As far as some of the macroeconomic issues, they were highlighted in our opening. We're continuing to push very hard and to drive that. Unfortunately, we had a down first quarter, an improved second quarter. We're driving hard and we do see a range that would pull us back to flat for the third quarter, but we are optimistic that we can have a better second half than a first half for Tellabs. But there's a lot of market differences across the world. We do certainly see trends of shifts more towards the wireless spend from wireline and we do see different market dynamics of which probably our biggest concern would be some of the issues in Europe, as well as the decrease in the foreign exchange rate impacting our -- that impacted our business in the second quarter.

Michael Genovese - MKM Partners LLC, Research Division

Okay. And then to the second question. When I think about your service business, is there any granularity you can give us to the services business in terms of how much it might be tied to deployment services and ongoing product sales? Any correlation to the new product sales as opposed to, i.e., ongoing maintenance and support at customers that are not related to new product sales?

Daniel P. Kelly

Right. So the way we look at the services business, Michael, is it's really composed of multiple pieces. What we would call services that would include support agreements, EF&I, that type of work. But then we have another newer area that we started up a few years ago around Professional Services, which has been a growth area for us, including the innovations around the Tellabs Insight Analytics product that we did announce our first customer, a major Tier 1 on the call today. So the Professional Services piece of our overall services business is roughly 20%. So the rest of the balance of the services business would be what we would refer to as product-attached services.

Michael Genovese - MKM Partners LLC, Research Division

So just to make sure I heard that right. About 80% of your service -- sorry, 20% is product-attached and 80% is not?

Daniel P. Kelly

No, no. I'm sorry, Michael. What I stated was 80% is product-attached and 20% is Professional Services, which isn't directly product-attached, but in many cases, Professional Services can help our customers as they design, build and operate networks, as well as introducing solutions like the Tellabs Insight Analytics. That would be the 20%, Michael.

Operator

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

Mark Sue - RBC Capital Markets, LLC, Research Division

Gentlemen, if I took a snapshot of your business at the moment, what percent of your business is levered to wireline versus wireless CapEx right now? And how do you think that changes maybe in a year from now?

Daniel P. Kelly

So good question, Mark, and I know that question came up on the last earnings call and is a constant question there. We don't slice the business that way. We do, from time to time, take a look at that from both a customer, as well as an application perspective. So we don't have those splits, but what you have to keep in mind that the dividing line between wireless and wireline isn't necessarily a hard divider. There's certainly operators that are wireline only and then there's others that are both. But what you have to be careful about is a lot of our products do carry lots of wireless traffic even though they would probably be considered wireline customers or wireline to applications such as metro ROADM networks that are utilized to carry traffic from the wireless networks. You also have wireline carriers traditionally that offer wholesale Mobile Backhaul services to wireless carriers, where we also participate. So the answer is we don't slice it that way, but it is a significant part of our business.

Mark Sue - RBC Capital Markets, LLC, Research Division

Okay. And then if I could ask technically, any thoughts of how you might diversify your revenues since 2 major domestic carriers control 70% of the CapEx? Or conversely, would you actually consider exiting some European regions since it doesn't seem like it's going to get any better anytime soon. And then lastly, operationally, are we all done with rightsizing the organization?

Daniel P. Kelly

Okay. So let me -- there was a couple of questions there, Mark, let me kind of take them in reverse there. As far as rightsizing the business, we're continually looking at our business, making sure we're managing cost tightly. As Andrew indicated earlier in his comments, earlier on the call, we are ahead of where we wanted to finish the year with an operating expense of a quarterly run rate of 110, finishing the second quarter at 106. We will continue to manage that extremely tightly, while making sure that we're investing in the innovations, as well as the sales channels, to make sure we reach our customers.

As far as diversifying and I think where you're going is maybe more of a retreat strategy in Europe, we have to be very careful about the macroeconomic trends. We have no plans on retreating from where we are in Europe today. Over the past 4 or 5 years, we developed some very important relationships in Europe with Tier 1 carriers where we want to continue those relationships, continue to drive that. We also invested in Russia, which has been a growth area for Tellabs. So I think the short answer is, we have no plans on retreating based upon the macroeconomic issues in Europe. We're going to continue to grow and lever our embedded base and customer solutions in Europe. I think the bigger question is, what have we done to try to add new customers and to expand our footprint in other areas of the world? And in particular, when you look at North America with the consolidation going on with carriers below, the smaller carriers than the AT&T and Verizons of the world, there's a fair amount of consolidation going on there, which we think is an important dynamic that we've had a long history of working with those carriers. And as they get larger, they're making buying decision about who are their strategic suppliers as they get larger. So we see a lot of opportunities in North America with carriers that have gotten much larger through consolidation, where we have long-standing customer relationships and where we have solutions so we can help them grow their business as well.

Operator

Your next question comes from George Notter with Jefferies.

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

I want to ask some questions about new products. On the 8611, I think you said on the monologue that it was shipped into controlled introduction in May. When might you start to see that really ramp the revenue? I'm a little bit confused here because I think last quarter, you guys said that you had it deployed in several live networks, you're taking revenue on already. Where is the 8600 right now or 8611 right now?

Daniel P. Kelly

So let me try to peel that one apart a little, George. The 8611 was the second new product in the 8600 over the last 12 months. The first was the 8609, which was released and when we release a product, it goes into controlled introduction with a handful of customers prior to general availability. So we released the 8609 first, then the 8611. We had a couple of very important customers who are queued up and we did a fairly quick rollout with a couple of customers around the 8609 and 11. We did recognize revenue in the second quarter for the 8611, and both of those products are in general availability and we'll continue to develop incremental software and hardware enhancements to those platforms as we go through the year. The third piece of what we call are really 8600 Mobile Backhaul refresh, not only on the small sell-side aggregator devices, but also on the larger nodes, is we did introduce a new System Release on the 8600 System Release 4.0, which adds significant capacity expansion to help our customers keep up with the bandwidth demand. So that was also released and is currently in controlled introduction. So I apologize if the message wasn't clear, but we really had, in that area, really, those 3 innovations that we have developed and released for the market over the past 12 months.

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

Got it. Okay. And then I also wanted to ask about the 9200, I guess, the content of where routing platform you guys are building. Can you give us an update on where you are with that system in terms of delivery, trials, revenue, engineering milestones, anything you could tell us would be great there.

Daniel P. Kelly

Sure. Happy to do that, George. The 9200 is moving along quite well. We have a very capable and focused team, as well as account team working with a handful of customers, key customers that will be our initial customers for the 9200. And we are doing testing at this point in time with some key customers around the 9200, and we would expect that activity to increase as we go throughout the year.

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

Got it. And then when would that product be shippable for revenue?

Daniel P. Kelly

Towards the second half of the year.

Operator

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

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

Maybe just to start, were there any 10% customers in the period?

Andrew B. Szafran

Yes. It's Andrew here, Jess. We had 2: one in North America and one in international.

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

Were there any others that may have been close to that level?

Andrew B. Szafran

Yes, a couple that are in kind of the high-single digits.

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

Okay. Maybe just moving on, I was hoping you could talk about the progression of activity in the quarter. Last quarter you suggested you saw an uptick in activity with some of your North American carriers towards the end of the March period. But based in your guidance, it appears as though things began to change at some point in the period. So perhaps you can help us understand to what degree things in North America have deteriorated versus your original expectations, when you began to see activity here tick down? And then I'd be curious to understand if you still expect North America to be up in the second half and/or is it right to assume that the down sequential guidance, a more cautious outlook for the second half is mostly due to Europe?

Daniel P. Kelly

So I'll take that one. Whenever we start a quarter, we certainly have a pretty detailed forecast and schedule around how we think the quarter is going to end. But as -- we live in a pretty dynamic environment here, there's a lot of twists and turns from day 1 in a quarter till the day we close the quarter. And things move up and down. Certainly, we were impacted by the foreign exchange rate with the euro within the quarter, but we did see some uptick as the quarter moved through with some business uptick in North America, which was positive. So again, a lot of moving pieces, which makes it always a challenge. But we have built in, obviously, a lot of agility into our program to be able to respond to our customers' change in demand throughout the quarter. But in the second quarter, we did see a downdraft due to the foreign exchange issues, but that was more than offset by some increases in North America.

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

And maybe just as we look to the second half and you look at your North American business, second half versus first half, are you expecting that to be up or do you think that will be flat, down? Any incremental color you can provide there?

Daniel P. Kelly

I would say, and again, we don't give guidance into 2 quarters out, but I would say it's more or less going be flat with a fair amount of moving pieces there.

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

And would you still expect some seasonality in the fourth quarter?

Daniel P. Kelly

I believe the seasonality you're talking about is traditional fourth quarter being the strongest with third quarter being the weakest throughout the year. We would expect to see some uptick in the fourth quarter.

Operator

Your next question comes from Simona Jankowski with Goldman Sachs.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

If I heard you correctly, I think you added one customer in Mobile Backhaul which seems a little bit slower than past quarters. So if you can just update us on how you see the pipeline there and what the biggest opportunities are from a regional perspective.

Daniel P. Kelly

Sure, be happy to do that. Yes, that number is smaller than we've had in past quarters. I would still feel that in that area for Mobile Backhaul, as well as Packet Optical, that the pipeline is good. Some of that is just natural lumpiness. It's not that there was a lot of business out there that we could have won and didn't win, but we don't -- we see a good pipeline of opportunities around Mobile Backhaul with our products, as well as I mentioned earlier, with a lot of new innovations the we've introduced on the 8600. We do have a fairly large customer base of over 160 customers that will be working actively throughout the year. So it's not only new business, but it's also helping our customers expand their networks and deliver more bandwidth and services.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

And then on the optical side, you mentioned a tripling in 40-gig [indiscernible] starting to get into 100-gig trials. When do you think 100-gig will be meaningful for revenues and as you think about the early quarters of both the 40-gig and 100-gig RAMs, should those be additive or dilutive to your gross margins in that segment in the early quarters of the ramp?

Daniel P. Kelly

Yes, okay. A couple of good questions there. As far as 100-gig, the way that normally rolls out or has rolled out whenever you have a new technology generation, it's first in the long haul then moving to the metro. So we certainly see 100-gig starting to move into the metro and the need for supporting 100-gig client interfaces. Our customers are asking for that and we do see that based on -- we've been doing a fair amount of customer testing, we will be doing further customer testing in the second half of the year with some deployment towards the end of the year. Actual revenue for 100-gig, we do anticipate in the first half of next year.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

And the margin impact?

Daniel P. Kelly

Yes. In the margin impact, obviously, new technology with lower volumes, there tends to be more pressure on the margins early in a product's life cycle that then would expand as volumes increase. But given the low volume there, I don't think it will be a huge impact on our overall product margin in 2013. Obviously, we have to do other things within the portfolio in order to deliver solutions that do balance out some of the margin pressures that we have in other parts of the portfolio.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

And just on the 40-gig. Since that's ramping right now, is that having a negative impact on margins? And would be expect margins to come down in the second half for your optical segment?

Daniel P. Kelly

No.

Operator

Your next question comes from Alex Henderson with Needham & Company.

Alexander B. Henderson - Needham & Company, LLC, Research Division

I was hoping we could follow on the 40-gig, 100-gig commentary a little bit, just to make sure I understand what you're talking about. So when you're talking about 40-gig, are you talking about coherent or not coherent? And ditto for 100-gig.

Daniel P. Kelly

100-gig is coherent and 40-gig is noncoherent.

Alexander B. Henderson - Needham & Company, LLC, Research Division

And do you expect to have a 40-gig coherent product or just go straight to the 100?

Daniel P. Kelly

We see the world moving towards the 100-gig and adoption there.

Alexander B. Henderson - Needham & Company, LLC, Research Division

Okay. And so I assume that you're not doing that in-house. Are you buying the 100-gig from third-party vendors?

Daniel P. Kelly

So we have a very capable optical team, but you are correct, Alex, we don't fabricate lasers, et cetera. But we work very closely with some key optical suppliers and partner with them.

Alexander B. Henderson - Needham & Company, LLC, Research Division

Okay. So can you talk about where you think -- how you see that fitting in against an environment where people are talking about flex coherent and things of that sort that might impede upon a metro deployment based on the strength of the long haul deployment and therefore, create problems for somebody who is only at the edge and trying to get into the metro core. I would assume most of your deployments are more in the metro edge.

Daniel P. Kelly

Absolutely. So really, where our strength is around the 7100 is the metro ROADM deployment all the way through to bordering on the access side, where our customers deliver wavelength services over the 7100 to large enterprises. So as far as -- I think you're asking a lot of questions about the migration and some of the channel alignment, it's an optical characteristic issues around the migration from 40 to 100 and long haul impeding on the metro. I think you're going down that kind of technical path. We work very closely with our customers to work out different technical issues around that and the 7100 product is fully engineered and architect to support the migration as we move through from 10 to 40 to 100 and beyond.

Alexander B. Henderson - Needham & Company, LLC, Research Division

If I could push the envelope with just one more step on the subject. I assume you're offering your ROADM technology to a multidimensional way of selective switching technology. Are you also moving to liquid crystalline silicone as part of that and driving that ability to handle mixed traffic types on your ROADMs?

Daniel P. Kelly

Yes. So we're looking at a lot of optical innovation as we move forward. I think we're probably getting a little deep on some of this, but rest assured we're working very closely with key customers in order to make sure that the products that we've been delivering and building some of the largest ROADM networks in the world will support a forward migration path.

Operator

Your next question comes from Simon Leopold with Raymond James.

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

First off, I just wanted to extend my condolences on Rob's passing to the team at Tellabs before getting into questions. It's certainly unfortunate. In terms of trying to look at the business here, I want to make -- get a quick clarification. In terms of the new segment, I think, we're pretty clear, but it does -- it appears what you've done essentially was taking the managed access business and split that into the optical and data segments and that's the gist of what these new definitions are. Is that correct?

Daniel P. Kelly

Essentially, yes. But that is how we're running the business.

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

Okay, okay, great. So in terms of the international exposure and the weakness in Europe, I'm just trying to get my hands around how to think about that. What portion of your overall business today is coming out of Europe?

Daniel P. Kelly

So, Simon, we don't -- first of all, thank you for your comments earlier about Rob, we appreciate that. But as far as the regional splits around that, we don't usually go into that level of detail, but rest assured, Europe is our second largest market where we participate.

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

And I guess, one of things that I'd like to understand kind of the Europe issue that is in terms of the FX headwinds, I guess, there are 2 aspects to FX. One side of it is demand is affected when products appear more expensive to European customers. The other is just the conversion of euros into dollars. Is there a way that you can discern between those 2 issues?

Daniel P. Kelly

Well, we can give some pretty hard numbers for the second quarter, Simon. I mean, just the FX impact on our revenues, it was worth about $5 million in the second quarter. So just a $5 million cut on what would have been an even stronger revenue quarter, which was a pretty good result. The larger issue about demand is -- I'd take a long-term view, which is there are a lot of upgrades and big projects that are going to be happening in Europe. We've invested in Europe. We're going to leverage that and build on our customer relationships. So while something may be put out 1 quarter or 2, these projects are going to be there and Tellabs is going to be there as well.

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

Great. That make sense. One last one, please. At the midpoint of your guidance, it would imply a sequential decline, and I'm just wondering if you've got some thoughts on the mix in that sense of working at the midpoint. Which product category may be down versus others may be flat? How that might shift in the coming quarter's forecast.

Daniel P. Kelly

So, Simon, as I mentioned earlier, we're at the beginning of the quarter. We certainly have given guidance, $260 million to $290 million, with the $275 million being the midrange. There's really no definitive answer to that because the puts and takes that happened throughout a quarter could cover either of those possibilities. So to say the downdraft is absolutely going to be in this product. When we start the quarter, we have a worldview that is at least the size of the guidance and beyond, and we try to work hard to hit the high end of the guidance. But there's no one answer to that right now because of some of the moving pieces that happened within the quarter.

Operator

Your next question comes from Ehud Gelblum Morgan Stanley.

Ehud Gelblum - Morgan Stanley, Research Division

I also want to express my condolences on -- about Rob. A question on margin had been in the high 30s. In Q4, it popped up pretty strong about almost 43%, dropped back down to below 40%, now it's at 40%. Is 40% the long-term gross margin of that business and is that -- I mean, if we're modeling out 2, 3 years, that's basically what this market will sustain is a 40% gross margin and therefore, you have to move the OpEx around to work with that? Or can we possibly see it going back up to the 43% to 45% range on a more permanent basis?

Daniel P. Kelly

Good question. I think it's a safe assumption to look at 40% as being kind of a target margin for us. I think there's going to be some movement up and down based on product mix and where we are in product life cycles and even within the products there are different margins as we initially deploy versus build out. But I think that's a safe assumption.

Ehud Gelblum - Morgan Stanley, Research Division

Speaking about the different product categories and then within the product as well, is it safe to say that both optical and access are below that 40% mark and data is the one thing that's pulling it up or is it optical because of the 5500 still roughly around 40%?

Daniel P. Kelly

No. Data is the highest then optical and then the access.

Ehud Gelblum - Morgan Stanley, Research Division

But data -- but optical and access are both below, 40%, they're both below corporate average?

Daniel P. Kelly

Slightly.

Ehud Gelblum - Morgan Stanley, Research Division

Okay. Do we know how large or how small, I guess, I should say, the 5500 and 5000s are today? What have they shrunk to in terms of that category?

Daniel P. Kelly

So the 5500 is included in the optical category and certainly, it has been a phenomenal product for Tellabs in the industry, but it is going through a sequential decline. We actually had really 2 life cycles on that product. One was in the '90s and then another resurgence back in around 2006 more around wireless carriers. But the 5500 is in what would be a traditional sequential decline year-over-year.

Ehud Gelblum - Morgan Stanley, Research Division

Right. I drove both of those firsthand. Do we know roughly how our large it is as a percentage of optical at this point?

Daniel P. Kelly

Yes. We really don't split that out at this point in time.

Ehud Gelblum - Morgan Stanley, Research Division

Okay. It would be helpful just in terms of -- that has always been a risk factor. It's a continuing risk factor and the smaller it is, the less the risk is going forward. So at a certain point, it might be helpful just to say it is smaller than 5% of the category, don't worry about it, it's smaller than 10%, whatever it is.

Daniel P. Kelly

Okay. That's a fair request. The other thing you have to remember is we certainly have a huge embedded base of products like the Tellabs 5500, 8100 and 6300, and it's really hard to predict the tail on those products and we try to do things to extend that tail to help our customers extend the life-cycle and help their return on investment with those products that they have bought. So we're always looking at what we can do to help our customers extend the life cycles there, but you can't reverse the tide at some point in time when you get out 15 to 20 years into a product life cycle.

Ehud Gelblum - Morgan Stanley, Research Division

Great. Within optical, however, there was a favorable mix shift and it sounds like within the 7100 is where the mix shift happened. What was that mix shift? Was it basically just cards versus chassis? Or was there an actual improvement in the 7100 product margin?

Daniel P. Kelly

Right. So the 71 -- the optical segment did grow revenue sequentially and with an improvement in the margin as well. A lot of that business, as you know, when you win an optical deal with a product like the 7100, initial margins are much lower as you're selling the common equipment, the shelves and then the margin picks up as you sell transponders. So it was more or less a product mix issue within the improvement in the optical segment. At the same time, we're also innovating on new modules and capabilities within the products to help our customers and we've introduced higher density transponders in order to help improve the density and reduce the cost per lambda for our customers as well, and that also plays into it.

Ehud Gelblum - Morgan Stanley, Research Division

So should we read a little bit into this that the ratio of new customers this quarter was a little bit lower than the past quarters and that helped the margin?

Daniel P. Kelly

No. Because new customers, the initial revenue is usually low in ramps, but we did add 4 customers as mentioned earlier when we opened up in the optical space and we're very comfortable with where we started the year with the number of customers that we were targeting and the number of wins in both the optical and the Mobile Backhaul space.

Ehud Gelblum - Morgan Stanley, Research Division

Okay. I'll get that offline, I guess. The last one being on international pop. Was that sustainable? The growth in international, or was that kind of a 1 quarter thing?

Daniel P. Kelly

Well, as we mentioned earlier, there are some challenges in Europe and the one market that sequentially did not grow, in Andrew's opening comments, was Latin America but at the same time, we're filling the pipeline and we do see opportunities in Latin America. But we do see challenges in Europe as we look out towards the second half of the year.

Andrew B. Szafran

Yes. And the best color I can give you on Latin America, is we're not worried. There were some short-term things happening at our customers, which kind of drove that, some labor issues which would cause a customer not to be able to move ahead with projects in the short term. So we really look at our growth internationally as very favorable and we see that continuing in the quarters to come.

Operator

Your next question comes from Rod Hall with JPMorgan.

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

Also want to express my condolences for Rob. A couple of, I guess, follow-ups on things that have been asked earlier. The 8611, can you tell us how that's impacting the order book for the 8600 product family? Are you seeing an increase in the order book as a result of that product becoming available and just kind of trying to gauge what the -- again, what the interest level is, but also quantify how that's impacting the order book. And then on the European FX, can you talk about euro cost? I mean, I don't think you have many, if any, but are there any euro denominated costs that would offset the revenue impacts of the FX? And then lastly, on this 10% customer in Europe, can you talk about what's driving growth in that customer? Is that mainly 8600 business? Are there other things driving growth and what's your growth expectation for that particular customer going forward?

Daniel P. Kelly

Okay. We'll kind of split those apart, Rod. Thanks for the question. The last is around the 10% customer, the international customer, and most of that is around our Mobile Backhaul product. The vast majority would be around the Tellabs 8600, which is driving that. I'll turn it over to Andrew for your question around the cost because certainly, we do have cost. We have a design center in Finland, so we do have a fair amount of costs that are in eurozones.

Andrew B. Szafran

Yes. And just to give more color on that, the euro decline was -- as you all probably know, it was weighted towards really the back third of the quarter. So it impacted our shipments far more than it impacted our expenses on a normal basis. So had we -- I spoke about kind of a $5 million hit to the top line. I think if that had happened day 1 of the quarter, we would have offset that with probably about $2.5 million to $3 million of reduction in our euro expenses, but it didn't really happen -- it didn't happen that way. So net-net, another way of saying that is based on our international operations in a normal quarter, we have a lot of natural hedge in our business and because of the way the euro declined kind of rapidly towards the end, it was -- our natural hedge was off.

Daniel P. Kelly

I'm not sure we got to your first question though, Rod. I think you asked 3. Did we cover them?

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

.

Yes, yes. The first one was on the 8611, just the order book for the 8600 family. What's the impact been from the 8611? Have you seen an increase in the order book? Do you think that -- I guess, one of the things I'm curious about is whether you could take share back in North America. You lost quite a bit of share over the last 18 months, 2 years and just wondering if those new products give you a chance, you think, to take some of that share back. And then just more broadly, whether that you're seeing an uptick in the order book as a result of them.

Daniel P. Kelly

Yes. So as far as North America, we're always look for opportunities to gain share back. The 8611 in 8609 are part of the refresh as far as delivering more capabilities and being able to offer the overall portfolio of having the right products that help build these backhaul networks cost-effectively for our customers. So the 8611 is in its early phases. We did have a lot of activity in the second quarter. There were some pent-up demand with a couple of customers that are rolling out that product now. Obviously, we don't split out the revenue down to a sub product level, but we do have a lot of high expectations around the 8609 and 11 as part of that 8600 Mobile Backhaul portfolio.

Operator

Your next question comes from Greg Mesniaeff with Maxim group.

Greg Mesniaeff - Maxim Group LLC, Research Division

You mentioned the 4.0 software release for the 8000 series that you shipped to a handful of customers. I was wondering if you can give us more color on that.

Daniel P. Kelly

Sure. I'd be happy to do that, Greg. As we've announced over the past few years, we took an approach where we wanted to really provide a world-class network management solution that allows our customers to build and operate networks across both our data and optical platforms. So what we have is a product that, as we've developed it over the last 3 or 4 years, has increasing integration across our entire portfolio. So System Release 4.0, which was released just this year, picks up all of those newer capabilities, both from our backhaul and optical solutions. And as Andrew mentioned earlier, down to Latin America in particular, we have many customers who the Network Manager -- not only in Latin America but in other parts of the world is a very compelling value proposition, allowing them to expand services, add additional products, additional Tellabs products and manage them all under one management system. So the release that came out with 4.0, it's in synchronization with the other optical and backhaul releases that we have. And roughly, we're on a heartbeat when we release that at least once a year, but more likely around every 9 months. Again, to pick up the overall portfolio capabilities for both optical and backhaul.

Greg Mesniaeff - Maxim Group LLC, Research Division

And then you mentioned that you just had a reorg of your R&D operations. Can you quantify that to the extent you can?

Daniel P. Kelly

Sure. We can give some color around that. As we announced in January with the exit from the packet core business, we felt it was very important to have a better alignment around our data portfolio and to have more common planning and R&D capabilities within those -- the 3 product segments plus the services segment. So the segment reporting that we've moved to today mirrors how we run the business inside Tellabs. And I think, it just helps. It's much, much cleaner. We've taken away a lot of the reporting structures that we had in previous financial reporting and it's very much in line with how we run the business, how we want to present Tellabs to the market and to deliver solutions there.

Greg Mesniaeff - Maxim Group LLC, Research Division

Any opportunities for cost savings from that?

Daniel P. Kelly

Well, if you could see from our R&D expenses going down quarter-over-quarter, it's not only the packet core business that we exited, but also by realigning the businesses, there is efficiencies in doing that as well. And we continue to look, not only in R&D, but across the company at other ways to drive cost out, while investing for innovation and sales around the world.

Operator

Your next question comes from Blair King with Avondale Partners.

Blair King - Avondale Partners, LLC, Research Division

I just have to kind of dovetailing on a couple of early ones. First, just in terms of profitability in the data segment. Is there any way to sort of parse out what the new product introduction costs are in there and how that profitability moves, sort of trends going forward? And particularly, just given all the activity that seems to be taking place around the 8600 product.

Andrew B. Szafran

Blair, it's Andrew, I'll take that. I mean, you have to look at -- as Dan mentioned, we reorganized the business so all of the data portfolio is together and we have a mix of products in different life cycles and it's really incumbent upon us and that business unit to manage those life cycles. Early products are being introduced, there's going to be more margin pressure because we're catching up on the R&D that's in there and life-cycle products carry better margins because we've greatly reduced the investment. So you really have to look at the portfolio. We managed those little components and that's what, I think, you and the investor base has to get comfortable with as we will manage the life cycles on both ends.

Blair King - Avondale Partners, LLC, Research Division

Okay, that's fair. And then the last question is just going back to the optical piece of the business. Is there any way to break out what percentage of that business is international and what percentage is domestic or at least give some color around that, the weighting.

Daniel P. Kelly

Yes. So, Blair, we don't split that stuff out. But as you can imagine, just based on the products within that category, 5500, 7100, a lot of that is North America. We've been spending a fair amount of time and energy pushing our optical solutions, 7100 and 7300 in the different parts of the world, and we've had some success there. Some of the wins are in international markets and will continue to be because we believe in the value proposition of the product, as well as the ability to bundle our optical and backhaul solutions to deliver that to the marketplace.

Operator

Your next question comes from Jim Suva with Citi.

Jim Suva - Citigroup Inc, Research Division

The first question is on your OpEx. Much, much better than I think everyone expected and earlier than expected. But to be fair, I want to ask, should we expect that to continue to keep going lower or it's kind of the one [indiscernible] good run rate. I just don't want people to get too excited, think it's going to keep coming down at the rate it has or maybe indeed it is. And then my follow-up is, can you just update us on your cash position and use, your priorities of cash with the stock trading below book values. I'm sure you're aware of stock buyback versus M&A or need for cash for restructuring. If you can you help us out on those 2 questions.

Andrew B. Szafran

Sure, Jim. So the answer to your first question, I think what we've guided for the next quarter is flat to where we ended up. So we are favorable to the $110 million that we reached and we expect the third quarter to be roughly flat. That said, as Dan mentioned earlier, we are going to be relentless in terms of streamlining our business and driving efficiency and that's going to continue into the future. As far as the cash balance goes and buybacks, we are, in terms of management and the Board of Directors, continually looking at the best possible ways to strategically deploy cash. Doing a stock buyback is one of those alternatives but not the only one. So it is continually on our radar screen and we did not execute on our buyback in the last quarter. We're not happy with where the stock price is, but we're here to drive value in the business itself and we will be continually looking at the best way to deploy our cash.

Operator

Your next question comes from Jon Fitch Thorne [ph] with Dialexic [ph].

Unknown Attendee

So first of all, I do want to express my condolences. It was very sad and it create work [ph] for the company. But let me just follow-up on the previous question, which I appreciate from Jim, regarding share buyback. It seems to us like at this point, share buyback is something that should be executed with a price in mind. Certainly, there are times when your stock price is going to justify investing in other businesses over your own, but when your stocks hit $3 and the enterprise value is below $200 million on a business, it appears to be breakeven. It seems to us that there isn't a more compelling investment in the marketplace than you can make other than investing in your own company. So it seems to me inexcusable that no shares were bought. Help me understand the philosophy behind share buybacks because if it wasn't justifiable in the most recent 90-day period, I can't imagine when it would be. So maybe there's a disconnect for us.

Michael J. Birck

John, this is Mike. I'll try to address that question a little bit. First of all, stock buyback is not the only use of capital that we are concerned with and we'll -- we constantly, the board constantly monitors a lot of variables in this area. One of those, obviously, is the cash situation. Given the nature of the economy, we've been cautious in buying back stock. It doesn't say that caution will prevail well into the future. We didn't buy stock back last quarter given that the uncertainty of the economy and so on. But it is a question that we address frequently and we will continue to do that. I just can't give you an assurance one way or the other.

Unknown Attendee

But, Mike, help me philosophically. Because I understand being cautious, but you have almost $1 billion and your stock is trading with an EV approaching 0. And you guys, impressively, and let me commend you, have managed to make this company basically free cash flow neutral in a terrible environment, which to me states that, okay, you don't need -- you're not going to burn the next $1 billion, which I commend you for as a shareholder. But in that case, to the extent you guys really mean that you can maintain free cash flow neutrality at least, if not profitability as you've guided to, why wouldn't you buy stock? Help me understand the philosophy, the conversation that happens at the board level. Why is it at $3, it's not the best investment you can make?

Michael J. Birck

Well, look at it this way, John, we have a need to balance our cash position and our resources against a variety of parameters. When we enter the third quarter, we certainly, though we had expectations and hopes that we would come out of the quarter with a black on the bottom line, we absolutely were not convinced of that. And buying stock back when there was a prospect of further losses doesn't make a lot of sense. As we gain more confidence in the future and our customers' ability to continue their activities, that changes. I just don't think that stock buyback is the only issue that influences stock or our customers or our shareholders. I know that's you, but that's -- we're not -- that's not the only issue that we have to keep in mind.

Unknown Attendee

The point I want to emphasize, from a shareholder perspective, is I don't think shareholder buybacks are always the right answer, either. But I do think there's simple math involved where at a price, to the extent you guys are going to be as disciplined as you express about maintaining profitability, which I really applaud, then at a price, you should be buying back the stocks. You do not need $1 billion to run this company sitting on your balance sheet. So what is the number? And...

Michael J. Birck

Well, we do not need $1 billion to run the company on a day-to-day basis but there are other things possible and potential uses for that cash. If you want to talk about this further, I don't think you want to hold up this whole call, why don't you call me or Andrew and talk about it off line.

Unknown Attendee

Okay, I'm happy to do that. Let me just ask one more question on a similar line. There's been a lot of transition here, and first of all, I just also want to applaud the company in welcoming both our and other shareholders input. I really have never seen a company be as open to shareholders and I hope that this is the beginning of the new very shareholder-friendly Tellabs with openness and increased transparency and everything else. And so I would -- I just want to encourage that to continue to be the trend. There was a couple of questions about the 5500 on this call as a percentage of revenues and that's the kind of thing where, I think, with your stock as depressed as it is, shareholders need increased transparency. Obviously, a lot of bad news is factored into your stock and so let's just get it all out on the table. And with that, my question/comment is I think a lot of us on this call and a lot of the questions, you were kind of beating around the bush of what is the Tellabs of the future? What is the business model? What are the products that are being focused on? What are the real margins that we can expect in optical? Are they trending up, are they trending down? Not necessarily with some kind of 2 quarter or 3 quarter guidance, but with a long-term view so we understand what the goals of the business are that you guys are building towards. So we understand that there's a vision of the future that we can measure you against. And so I know you don't have that answer right now on the conference call, so I'm going to ask a fraction of it, but I would encourage for the next conference call that you do present that to the shareholders. What about asset divestitures going forward? Are there other assets that as you guys have been looking through these difficult times that -- can you even without even possibly naming what they are specifically, are there other divestitures that you think there are that you guys might be able to spin off?

Daniel P. Kelly

Okay, John, this is Dan. I'll try to take what I think are your last 2 areas, and also, happy to go into more detail. We've certainly tried since January in all of our messaging to shareholders at the shareholder meeting via our external communications and on calls like this to be very clear of where we think we're going with the company from a product and market perspective around the key applications that we have outlined. I think what you're looking for is probably more financial goals, 2 or 3 years out or market share goals, things like that. Happy to talk about those in more detail. As far as detailed granularity down to a product level, at some point in time, as we mentioned, there's so many moving pieces within the quarter that, I think it would add a lot of probably noise more to our business than not by going down to each and every product line, frankly. And I think we've grouped the products. There's different life cycles for different products. There's directional assessments, but it's very difficult to say where the 5500 will be next year. We've done lots of modeling. We've done T1 usage modeling on that product for the last 10 years. But frankly, there's still a lot of dynamics in the market there. So happy to do more of that, but I think we have been pretty clear about where we are trying to take the company and...

Unknown Attendee

I am talking about financial goals. I don't need to know every product. I do think the 5500 is a significant part of your past and people are curious about it, so that should be disclosed. And I generally think that you should be disclosing -- if a lot of people are asking about something, you should be open about that, and I do think financial metrics are very important to measure the current and the new management team eventually against real objectives. What about asset divestitures?

Daniel P. Kelly

Okay. So we've looked at that from time to time and evaluated that. A lot of people speculate on later life-cycle products. Why not sell them? Why not divest them? And there's some very good reasons why we have looked at that and why we're not doing that. And if you take a look at for example, our access business. We have some very key customers that have bought a lot of access products over time. It's the heart of their access network. If you look at some major Tier 1 carriers in North America, we have a very large footprint there. We value those customer relationships and frankly, I think we do a pretty good job managing late life cycle products to maximize the customer support and minimize expenses and drive operating profit there. And I have looked at this from time to time and frankly, the path you'd be going down is divesting assets to have more cash. It's certainly something we do evaluate, but I think we do a pretty good job maximizing the investment and maintaining what our critical customer relationships, particularly in North America with much of our legacy business.

Unknown Attendee

Okay. Last quick question. Cash flow in next quarter, what are the working capital assumptions in terms of mix shifts or are there none?

Andrew B. Szafran

I think, John, we've guided that. It's our intent to be profitable and to continue to generate cash from our operations. That's going to include continuing to work hard on working capital across the board.

Operator

Your next question comes from Tal Liani with Bank of America Merrill Lynch.

Tal Liani - BofA Merrill Lynch, Research Division

My questions have been answered.

Operator

And your next question comes from Amitabh Passi with UBS.

Amitabh Passi - UBS Investment Bank, Research Division

I just had a quick question for Andrew. How do we think about the variable component of your OpEx? I think it goes to a question that was asked earlier. I'm just curious if we did see revenues trend back up $300 million, $350 million. Can you hold OpEx on an absolute-dollar basis at the current levels or how should we just think about just the leverage of the variability in the OpEx?

Andrew B. Szafran

That's a great question. What I will tell you is as we're driving our efficiencies here and taking cost out, we are very consciously trying to build our expense base so that it is leverage-able. So the things that we are doing are not short term in nature and that will rise back up. We're trying to make it -- our cost basis as leverage-able as possible, particularly on the G&A side.

Amitabh Passi - UBS Investment Bank, Research Division

Okay. And then just a quick follow-up on the question that was asked by the last speaker. Specifically, working capital. I think inventory turns of 5. Again, I just wanted to see if there's any guidance you can give us. Could that get slightly better or do you think that's probably a reasonable assumption for now, about 5x?

Andrew B. Szafran

I think it's a good assumption for now. There are always challenges in our model based on the variability of what products wind up shipping. We spend a tremendous amount of time in the demand planning and supply chain management. I think we are in the top quartile, it's not higher in the industry in terms of inventory management and we will continue to drive improvement there. But I think that's -- 5 turns is pretty damn good, and I think a good assumption.

Operator

At this time, there are no further questions. I will now turn the conference back to the presenters for closing remarks.

Daniel P. Kelly

Okay. First of all, I'd like to thank everyone for participating today. We covered a lot of ground today. And what I want to leave you with, what we believe is important, what we're focusing on, I do believe we have the right people on the leadership team in place to move the business forward. Our team knows the business, our strategy and our customers. We do have a solid strategy focused on Packet Optical, Mobile Backhaul and Professional Services. We are innovating in our product portfolio in order to help our customers succeed, while at the same time, keenly focused on improving Tellabs' profitability. I'm confident we're on the right track and we are moving Tellabs forward. Thank you.

Operator

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

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