LISLE, Ill.-As recently as a year ago, investors feared Tellabs Inc.’s flagship telephone network-management system-long considered the industry Cadillac-was on its way to becoming an Edsel.
Instead, Tellabs’ flagship Titan line today looks more like a hot rod than a family sedan, driving the Lisle, Ill.-based company’s sales up 50 percent in the first quarter, compared with a year ago.
“Business is far more robust than a lot of people would have predicted,” said Mathew Steinberg, an analyst at RHK Inc., a telecom industry research firm near San Francisco.
Tellabs’ surprising comeback since its aborted $7-billion deal in September to buy Maryland-based Ciena Corp. is fueling investor confidence in Tellabs’ staying power, at least for the near term.
While Ciena still is struggling, Tellabs stock has roughly tripled since September, to the $55 range last week, adjusted for splits.
“There is still plenty of life left” in Tellabs’ Titan line of network-management products, noted Kenneth Leon, a telecommunications analyst at ABN AMRO Inc. in New York.
Indeed, Tellabs continues to grow at better than 30 percent annually, while posting a 35-percent return on equity each of the last two years. It’s expected to top $2 billion in sales this year, hitting the mark a year ahead of schedule.
Tellabs founder Michael J. Birck and his team are scheduled to roll out the largest number of new products in the company’s history this year-including a next-generation sequel to the Titan line in the fourth quarter.
They’ve also hit the acquisition trail again-albeit in a less-ambitious fashion-with the $110-million cash purchase of a unit of Paris-based Alcatel SA. The acquisition extends Tellabs’ growing overseas presence.
Birck said the Ciena debacle-Ciena’s sales cratered before the deal had closed-hasn’t turned Tellabs off the hunt.
“We’ve spent an enormous amount of time and money in the acquisition area since November,” he said.
He doesn’t rule out another attempt at a large acquisition: “It would be foolish to say we’re now timid where before we’d been bold,” he told shareholders at the recent annual meeting.
But he’s more likely to pursue niche opportunities this year. “We’d probably prefer a smaller entity, under $1 billion in market cap,” he said in an interview last month.
That would rule out such potential targets as Canada’s Newbridge Networks Corp., with a market capitalization nearing $7 billion.
A smaller possible target: California’s Tekelec, a networking systems player with a market cap just under $1 billion.
Birck declined to identify targets, except to say Tellabs needs more data-networking expertise. “When we talk about the need for an acquisition, that’s generally where our thoughts turn.”
When pressed, he said Tellabs has more than three deals in the pipeline. “But all may not materialize,” he cautioned.
Longer term, Tellabs will need to pursue larger acquisitions if it wants to become a top-tier provider to an industry that is consolidating into fewer, larger global carriers.
Industry suppliers like giant Lucent Technologies Inc. of New Jersey are buying data-networking equipment players like California’s Ascend Communications Inc.-a company Birck says Tellabs approached last year, both before and after the Ciena deal. Lucent is paying $21 billion for Ascend.
Analyst Chandan Sarkar at Connecticut-based SoundView Technology Group believes Tellabs’ prospects are bright in the near future. But for the long haul, he said, “They need to buy some companies and partner with some other ones.”
He said the equipment industry is evolving from a highly competitive market into more of an oligarchy, where camps of closely affiliated smaller companies ally with a few major players to offer customers complete systems, called end-to-end solutions.
For now, Birck has his sights set on tripling Tellabs’ sales to $6 billion by 2003-an ambitious target that he says can be reached even without acquisitions.
Key will be industry acceptance of a flurry of new Tellabs products coming to market in the second half of the year, including Tellabs’ sequel to Titan digital cross-connects. Digital cross-connects help phone companies manage voice and data traffic flowing in and out of their central offices.
New networks better-suited to handle the surge in data traffic generated by the Internet eventually will eliminate the need for central offices. Meanwhile, Tellabs’ new-version Titan systems are helping carriers manage the transition. And despite expectations to the contrary, demand for these transitional products remains strong.
About 50 percent of Titan’s sales are to traditional Bell players like SBC Communications Inc., and the remainder includes next-generation carriers such as Omaha-based Level 3.
In addition to new Titan systems, Tellabs is releasing equipment aimed at the promising cable telephony market, with a potential for capturing business from players such as AT&T Corp. that plan to upgrade cable TV networks to deliver voice and data.
“We do have a fair amount of stuff coming on line,” said the characteristically understated Birck. “It looks to be a pretty good fit to what the market is going to need.”
Barbara Rose is a reporter for Crain’s Chicago Business.
