Tellabs cuts investment in access business

Tellabs is shifting its development efforts away from its access equipment business in favor of more lucrative areas, the vendor announced today as part of a broader restructuring effort meant to address an increasingly difficult market.

Tellabs plans to cut 280 employees between now and the middle of next year (about 8% of its current workforce), most of which will come from the access business. It will also decrease its investment in access products and shift those resources to higher growth areas – in particular mobile backhaul, optical networking and business services delivery.

On today’s third-quarter earnings call, Tellabs repeatedly emphasized that it was not exiting the access business and would continue to support existing and future deployments for its more than 700 customers there. It will also invest in new feature development for its access products but at a lower level than before.

"Tellabs has a void in its strategy," Morgan Keegan analyst Simon Leopold wrote in a note late Tuesday. "But with $1.17 billion -- or $2.93 per share -- of net cash filling the gap, we see little downside."

And in another note early Wednesday, UBS analysts upgraded Tellabs' stock to "buy," arguing that its moves would stabilize the company and pointing out that 40% of its sales now come from growth businesses: next-generation wireless backhaul, metro optical and services.

In April of this year, Tellabs announced it would walk away from a contract to be one of three suppliers to Verizon Communications’ gigabit passive optical networking (GPON) deployment, which began to ramp this year. That move was based on the business’ poor returns, stemming in particular from unprofitable optical network terminals (ONTs), the customer premises gear in fiber-to-the-premises networks.

Following that move, some analysts wondered if Tellabs would sell its access business, a question the company addressed on today’s call. “We didn’t see that that made sense to either shareholders or customers,” said Tim Wiggins, Tellabs’ chief financial officer. “Of course, if someone showed up with a truckload full of money, we’d take a look.”

Tellabs announced today’s move following a tough third quarter, in which it reported a nearly $1-billion loss and a revenue decline of 7%. The vendor expects flat to declining revenue in the fourth quarter as overall economic trends cheat the company of the seasonal revenue boost it usually sees at the end of the year.