Tellabs slashes workforce after ‘painful’ Q1

Tellabs announced it would eliminate 665 employees, or 14% of its workforce, today after what the company called a “painful” first quarter.

“Despite our best efforts, we have not established a stable, profitable business,” said Tellabs CEO Michael Birck, adding that an industry recovery isn’t likely any time soon.

The network equipment vendor ended the first quarter of the year with a net loss of $43 million, or 10 cents per share. Sales for the quarter sank to $222.5 million, a 29% drop from the previous quarter and a 40% drop from the $371.5 million in sales it earned in the first quarter of 2002.

Birck blamed the general “lethargy” of the telecom industry and unprecedented carrier frugality for the drop in sales. “For most of my career, our service provider customers placed attributes like service, quality and reliability ahead of cost. Unfortunately, that is no longer the case,” said Birck. “Cost is now the absolute determining factor in most [equipment] procurements.”

In particular, Birck attributed sagging North American sales to “virtually nonexistent” purchases from cable MSOs such as Comcast in the first quarter. “Comcast is not going to do much in the voice area until they get some other things organized,” he said.

To advance on what Birck called the company’s “painful path to profitability,” Tellabs is considering fundamental changes in all aspects of its business and corporate structure. The company reduced its operating expenses to $144 million in 2003’s first quarter, but executives intend to pare that number down to $125 million by the fourth quarter to achieve profitability.

Tellabs vowed to shift spending from existing products to new ones, citing that new products accounted for 13% of revenues for the first quarter. The company will consider acquiring other companies with promising technologies such as MPLS and IP data as part of that plan. “We’re not going to acquire our way to growth, but we can buy some time by doing some things in the acquisition marketplace,” said Birck.

Tellabs will also consider outsourcing manufacturing and making further reductions in headcount to cut costs. Today’s layoffs represent the sixth round for Tellabs. The company warned employees at the end of March that cuts were coming and offered “buyout programs” to workers who left voluntarily in advance of the announcement. New Tellabs CFO Tim Wiggins said he expected the company to take a $70 million to $100 million charge next quarter for the current restructuring.

“Every aspect of our business is on the table,” said Birck. “This is painful stuff.”