TOP CONTRIBUTORS

Eve Peters

Patrick Cushing

TLAB AT A GLANCE

P/E ► -2.55   EV/EBITDA ► -3.14   ROA ► -31.2% LOW ROE ► -40.5% AVG Debt to Equity ► 0.353 AVG Current Ratio ► 3.66 AVG

 

 

 

 

 

 

In 2007, Tellabs earned $1.9 billion in revenue,^[5] with $1.4 billion coming from North American operations, and $500 million coming from abroad.^[6] In October 2008, however, the company suffered a $988 million loss to write down the value of "goodwill" (intangible assets).^[7] The company also cut 280 jobs (roughly 8% of its workforce) due to weakening sales.^[8]

Since the late 1990s, major telecom mergers have strained revenues and profits from Tellabs' products. Between 1998 and 2007, a list of about twenty telecom industry giants became a list of ten^[9], and the larger, merged companies have since been able to consolidate resources and reduce their need for the kind of equipment that Tellabs sells.^[10]

Business Overview

Tellabs' Earnings vs. Revenue, 2005-2007^[11]

Tellabs' equipment enables telecom providers to meet businesses' and consumers' rapidly increasing demand for bandwidth with products such as fiber optic networks.^[12] These network solutions include technologies that transport new, 3rd generation services, streamline mobile networks to lower costs, and deliver broadband voice, data and video services using fiber-access systems.^[13] In 2007, Tellabs provided equipment to 30 of the world’s 35 largest service providers, including Verizon and AT&T.^[14] Servicing both domestic and international markets, Tellabs primarily sells to communication services providers, including local exchange carriers (LECs); national post, telephone and telegraph (PTT) administrators, wireless service providers, multiple system operators (MSOs), and competitive service providers (CSPs). The customer base also includes distributors, original equipment manufacturers (OEMs), system integrators and government agencies.^[15] Tellabs has strong relationships with global telecom service providers, including AT&T (United States), Ericsson (Sweden), NTT (Japan), T-Mobile (United States), Telecom Italia (Italy), Telekom Malaysia (Malaysia), Telstra (Australia), Verizon (United States), Vodacom SA (South Africa) and Vodafone (Hungary).^[1]

Business and Financial Metrics

Tellabs’ 2007 revenue of $1.9 billion fell 6% from a year ago,^[16] due mostly to reduced product revenue in the Transport segment.^[6] Over the same time period, gross profit fell by 28% from $934 million to $674 million - a result of the price-cutting induced by the increasing hyper-competition in the industry.^[17] Almost half of 2007's revenue came from products added over the last five years.^[18] Fiber-access systems performed particularly well in 2007, rising to a record level and accounting for 69% of product revenue, compared with 57% in 2006.^[18] In addition, Services revenue increased 22% from $183 million to $222 million.^[18]

Tellabs generates revenue through two avenues: direct sales and distributors. Most revenue in North America comes from direct sales (98%), but revenue generated internationally is split more evenly between these two channels (56% direct sales / 44% distributors).^[19] In 2007, Tellabs earned $1.4 billion (76%) of its revenue in North America, and $500 million (24%) abroad.^[6]

Business Segments

Tellabs' Revenue by Segment, 2007^[6]

Broadband

53% of Revenue, 11% of Profit*^[6] The Broadband segment includes product portfolios that facilitate the delivery of bundled triple-play services (data, video, and voice) and next-generation wireline and wireless services.^[20] Broadband revenue declined 6% between 2006 and 2007 from $1.08 billion to $1.02 billion, attributed mostly to price-slashing in the hyper-competitive, post-merger environment (but simultaneously mitigated by increasing demand for bandwidth to handle multimedia - average monthly IP traffic grew 55% between 2006 and 2007).^[21][6]

Transport

35% of Revenue, 68% of Profit*^[6] The Transport segment is focused on network devices that switch low-speed voice and data signals onto high-speed lines and vice versa, as well as voice quality enhancement products. Revenue from the Transport segment is earned primarily in North America, although the new segment began operating toward international markets in 2008.^[22] The5500 Digital Cross-Connect, a critical component of wireless networks, is Tellabs' flagship product. In 2007, the Transport segment accounted for the majority of gross profit (68%) and the highest profit margin (35%) of the three segments.^[23]

Services

12% of Revenue, 21% of Profit*^[6] The Services segment delivers deployment, support, professional consulting, training and systems integration services to Tellabs customers.^[24] Revenue from the Services segment increased by 22% in 2007, as Tellabs generated demand for deployment, professional and support services as a result of the rollout of its 7100 Optical Transport System - a new solution for boosting bandwidth.^[25] Customers enlisted the support of Tellabs Services in order to implement this solution, which leveraged significantly different technologies than those to which they had used before.^[26]

• Profit defined as gross profit less research and development expenses.^[27]

Key Trends and Forces

Merger activity among carriers decrease demand for Tellabs' products

Major telecom mergers (e.g., AT&T/BellSouth, 2007; Sprint/Nextel, 2005; SBC/AT&T, 2005; AT&T Wireless/Cingular, 2004) since 2000 have consolidated the carriers' resources and decreased their need for spending on equipment, thereby cutting revenues for manufacturers like Tellabs. In 2007 third-generation network build-outs slowed from previous-year levels.^[28] Some of the most significant mergers include SBC-AT&T, AT&T-Bellsouth, AT&T Wireless-Cingular, and Sprint-Nextel. In response to these mergers, several manufacturers have aligned as well, creating an environment of "hypercompetition" in the industry.

Decreasing revenue per unit sales despite growing broadband sector

The company's 2005-2007 Broadband segment profits have decreased at a time when per unit sales have increased. Revenue remained relatively constant in the $1.0-$1.1 billion range while gross profit for the segment dropped from $156 to $39 million.^[6] This revenue versus profit trend demonstrates an increasingly commoditized product. The increasing number of units sold is counteracted by a decrease in revenue per unit. Bandwidth consumption is increasing rapidly with Cisco reporting that the number of petabytes (1 petabyte = 1000 terabytes) of IP traffic per month was 4,234 in 2006, 6,577 in 2007, and 10,747 in 2008, estimating a compound annual growth rate of 46% between 2006 and 2012.^[29] The segment will continue to grow; however, margins from this segment will continue to decrease.

Tellabs' revenues are subject to boom/bust cycles of the internet

Since the majority of Tellabs' products are purposed to facilitate communications and Internet services, the company is vulnerable to the booms and busts of that market. The overzealous predictions and investments made during the first dot-com bubble and the subsequent bubble burst in 2001 left Tellabs and its competitors in an environment with too much supply and too little demand.^[30] That year the stock fell 85% from 65 to 9.7.^[31] The company never fully recovered from the downward trend that began in the early 2000s, and the impact of the more recent economic downturn (2006 onward) is reflected in the company's declining revenues. With 75% of its revenues dependent on North American carrier spending,^[32] Tellabs is particularly vulnerable to spending lulls in that region.^[33]

Competition

Mergers amongst both carriers and telecom equipment manufacturers have created an environment of intense competition for Tellabs.^[34] In such conditions, Tellabs will need to continue its production of highly specialized products in order to withstand the pressure to adjust its cost structure in the carriers' favor.^[35] Tellabs' closest competitors in telecommunications equipment industry include:

Alcatel-Lucent - Headquartered in Paris, Alcatel-Lucent provides services, hardware, and software to telecommunications service providers and enterprises worldwide. In contrast to Tellabs, Alcatel-Lucent generates sales almost equally between its European and North American regions.^[36] Alcatel-Lucent generated $26,205.8 million in sales in 2007.^[37]

Nortel Networks - Nortel Networks, a Canadian company, provides similar technologies to Tellabs and its competitors but has distinguished itself by making significant strides in servicing the Chinese cable television market.^[38] Nortel Networks generated $10,948 million in sales in 2007.^[39]

Ciena Corporation - Ciena Corporation is a smaller company in the same industry space as Tellabs.^[40] Back in June 1998, Tellabs announced that it would acquire Ciena for $7.1 billion in stock.^[40] However, after AT&T's announcement that it would not do business with Ciena, Tellabs walked away from the acquisition.^[40] Ciena has shown improvement since 2000 but generally struggles in the challenging telecom environment.^[40] The company generated $779.8 million in sales in 2007.^[41]

References

1. ↑ ^{1.0 1.1} Tellabs Fact Sheet
2. ↑ Tellabs Annual Report
3. ↑ 10-K 2008 TLAB, Exhibit 13, p16
4. ↑ 10-K 2008 TLAB, Exhibit 13, p8
5. ↑ 10-K 2008 TLAB, Exhibit 13, p2
6. ↑ ^{6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8} 10-K 2008 TLAB, Exhibit 13, p22
7. ↑ MarketWatch, Oct 21, 2008
8. ↑ Chicago Tribune, Oct 22, 2008
9. ↑ Network World, May 21, 2007
10. ↑ Highbeam Research
11. ↑ 10-K 2008 TLAB, Exhibit 13, p2
12. ↑ 10-K 2008 TLAB, Exhibit 13, p4
13. ↑ About Tellabs
14. ↑ 10-K 2008 TLAB, Exhibit 13, p5
15. ↑ 10-K 2008 TLAB, p3
16. ↑ 10-K 2008 TLAB, Exhibit 13, p3
17. ↑ 10-K 2008 TLAB, Exhibit 13, p3
18. ↑ ^{18.0 18.1 18.2} 10-K 2008 TLAB, Exhibit 13, p22
19. ↑ ^{19.0 19.1} 10-K 2008 TLAB, p5
20. ↑ 10-K 2008 TLAB, Exhibit 13, p21
21. ↑ GigaOm Jun 16, 2008
22. ↑ 10-K 2008 TLAB, Exhibit 13, p21
23. ↑ 10-K 2008 TLAB, Exhibit 13, p54-55
24. ↑ 10-K 2008 TLAB, Exhibit 13, p21
25. ↑ 25-Feb-2008 PRN20080225 Reuters, February 25, 2008
26. ↑ 10-K 2008 TLAB, Exhibit 13, p23
27. ↑ 10-K 2008 TLAB, Exhibit 13, p24
28. ↑ 10-K 2008 TLAB, Exhibit 13, p23
29. ↑ GigaOm Jun 16, 2008
30. ↑ Blogging Stocks
31. ↑ Google Finance
32. ↑ 10-K 2008 TLAB, Exhibit 13, p7
33. ↑ 10-K 2008 TLAB, p11
34. ↑ 10-K 2008 TLAB, Exhibit 13, p3
35. ↑ Hoover's Report on Tellabs
36. ↑ Alcatel-Lucent Fact Sheet
37. ↑ Hoover's
38. ↑ Nortel News
39. ↑ Hoover's
40. ↑ ^{40.0 40.1 40.2 40.3} Blogging Stocks
41. ↑ Hoover's