Tellabs braces for FTTP sales drop-off

Tellabs reported a 13% year-over-year revenue decline in the fourth quarter but warned of a greater drop to come, predicting first-quarter revenue to be down 19% to 26% from a year earlier, to between $345 million and $375 million.

The biggest single driver of that revenue drop is an anticipated decline in sales of optical network terminals (ONTs), the customer premises gear in fiber-to-the-premises (FTTP) networks, Tellabs said. Last April, the vendor opted to walk away from a contract to supply its biggest customer, Verizon Communications, with the next generation of FTTP gear: GPON. And six months later, Tellabs announced it was shifting development away from access equipment such as ONTs, whose thin, and sometimes non-existent, margins have long been a problem for Tellabs.

Tellabs’ prediction of an ONT sales plunge came the same day Verizon reported that the fourth quarter was the best quarter ever for its FTTP service.

Tellabs’ FTTP ONT business will decline as Verizon deploys more GPON, but the carrier is still adding subscribers to Tellabs’ PON gear, one reason why ONT revenue will continue to be “meaningful” in 2009, according to Tellabs’ Chief Financial Officer Tim Wiggins.

After acquiring a startup ONT vendor, Vinci years ago, Tellabs sought to aid ONT economics in recent years by working with vendor partners such as TXP, which suspended operations this month after failing to make payments to a major investor.

As for Tellabs’overall business, sales of its next-generation products – including its optical transport platform, multiservice router and carrier Ethernet transport platforms -- are growing, contributing slightly more than a third of Tellabs’ revenue last year (fourth-quarter revenue from its 8600 mobile backhaul edge platform, for example, was nearly double year-ago levels), they have not yet surpassed the vendor’s aging legacy gear.

Customer plans for the new year are mixed, Tellabs said. In general, those in emerging markets are predicting flat spending this year, while those in more developed nations could reduce spending 5% to 10%, being especially cautious in the first half of the year and re-evaluating plans for the second half.

“Customers are telling me they’ll spend on services where they can make money – business services delivery, mobile backhaul, and the capability to handle data and video traffic, which is manifesting in dynamic optical networking,” said Rob Pullen, Tellabs’ chief executive officer.

And despite the expected first-quarter revenue drop, the company expects gross margins to remain flat at nearly 42%, depending on the mix of products sold.