Tellabs’ New CEO Talks Strategy

A slowdown in the economy is hitting telecom equipment makers particularly hard. For Tellabs Inc., fewer housing starts mean fewer orders from customers like AT&T Inc. That’s presented a challenge for Tellabs’ new President and CEO Rob Pullen, who in February replaced Krish Prabhu. In an effort to reduce costs, Tellabs in the first quarter let go 80 employees, and 145 more pink slips are expected throughout 2008. In another key cost-cutting measure, Tellabs on April 2 announced it would not develop exclusive GPON equipment for Verizon Communications Inc. Kelly Teal, xchange’s business editor, recently spoke with Pullen about Tellabs’ strategy.

XC: Why did Tellabs and Verizon end the GPON partnership?

Pullen: We had been doing a custom development as an extension of our current BPON technology to Verizon. That was specifically the 8865, and it was only for Verizon. The economics for this 8865 no longer made sense to Tellabs. We couldn’t find a path toward profitability over the long term. As a result, we decided to exit that particular business, freeing up resources to innovate for other customers and help them succeed. We continue to have a great relationship with Verizon. We’re going to sell them multiple products and services – on a global scale, by the way. And furthermore, we are staying in the access business with the 1150 to focus on GPON for fiber-to-the-node, the curb and the prem.

XC: But analysts at UBS said the Verizon GPON exit likely signaled Tellabs’ exit from the PON market overall. So that’s not true, then?

Pullen: No, that’s not the case. We’re the biggest provider of access in North America, we’re still supplying BPON to Verizon to fill out all of our installed base, which will continue over the next quarters, and we are staying in the GPON business, but now with a single platform. As you can imagine, developing two separate platforms was expensive anyway for Tellabs. If we can address the broader market with one platform and one set of development expense, that would be more efficient for Tellabs.

XC: How will terminating the Verizon GPON deal affect Tellabs’ future earnings?

Pullen: The BPON rollout is one of the reasons our margins will be lower in the second quarter. It’s a product mix shift from the 5500 business toward lower-margin products like the ONTs for Verizon or the 7100 product family.

XC: What are some of the new products on which Tellabs is focused?

Pullen: Almost half of our first quarter 2008 revenue came from newer products such as ... access products, the data products and the optical products like the 7100 [ROADM]. We also recognized revenue from a new 7100 customer in the quarter as well. And you also saw me talk about all of the RFX wins on the 8600, predominately for mobile backhaul.

We’re inventing some innovative products, and we need to ramp those up more quickly. So the products are there. I like the 8600/8800/1150/7100 and professional services – those are all moving in the right direction. We’re not communicating our value proposition quickly enough and scaling that business quickly enough, but we’re going to focus on that.

XC: What will be Tellabs’ biggest challenges in the second quarter?

Pullen: Improving our gross margins is clearly going to be one of them. That needs to be done. But I think we performed well in a challenging industry environment, and our top priority is going to be to free up those resources to help customers, and I’m going to be focusing on investing more people into our growth product areas, while reducing expenses.

XC: Analysts have been speculating that Tellabs will be involved in some M&A activity this year. What can you tell us about that possibility?

Pullen: Tellabs is going to go alone for the foreseeable future. Where there’s a good opportunity for Tellabs to create value for customers and stockholders, we’ll be an acquirer.

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