ML: Tellabs transport business may stop growing this year

This could be the year that Tellabs' traditional transport business finally stops growing, Merrill Lynch analyst Tal Liani said today in a research note explaining his downgrade of Tellabs stock to "neutral."

Liani predicts Tellabs' traditional transport business, which relies primarily on its 5500 crossconnect, will report flat revenue in 2006 and declining revenues thereafter as carrier customers migrate toward next-generation technology.

A Tellabs spokesperson declined to comment, citing the need for silence as the company approaches its fourth-quarter earnings call on Jan. 26.

Analysts have long predicted Tellabs' transport business would one day plateau and eventually decline. But the business has remained strong to date, growing 8% year-over-year in 2005's third quarter and contributing $151 million, or about a third, of that quarter's total revenue.

To offset declines in transport, analysts have looked for growth in Tellabs' data business, whose chief product is the 8800 router the company obtained through its acquisition of Vivace Networks. Tellabs has vowed to win $60 million in data revenue in 2005, but at the end of the third quarter, the company had only reported $30 million.

Meanwhile, Tellabs' access business, driven by its position as supplier to Verizon Communications' fiber-to-the-premises deployment, has grown to become the vendor's biggest source of revenue in the third quarter, contributing $166 million, or nearly 36%, of quarterly revenues.

Tellabs also impressed investors late last year by winning a coveted contract to supply Verizon Communications with reconfigurable optical add/drop multiplexers, a next-generation transport technology.