i've culled a few paragraphs from Goldilocks' most recent TLAB report.
fwiw, GS appears very stoked on the record backlog and CableSpan's potential.
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Goldman Sachs
October 28, 1999
Tellabs, Inc. (TLAB)
Superior Visibility
Investment Summary
Tellabs's shares are up nicely after weeks of being
stalled. The good news in the September quarter-results
and the positive, confident tone on the
conference call are generating new interest. For the
next several months, we see a number of catalysts
for the shares. Most important, the recognition of
extremely strong backlog (it rose much more than
sales sequentially) will appeal to investors that want
December-quarter earnings certainty. The other
catalysts will involve new products or contracts. The
broadband cross connect, the TITAN 6500, will
begin its first customer trial early next year. A new
AN2100 customer is expected in the first quarter of
2000. AT&T is expected to announce that Tellabs is
supplying hybrid fiber coax telephony/data products
to its cable operations. Finally, as investors study the
implications of the broadband access buildout, using
the recent SBC announcement as a guide, they will
probably conclude that cross-connect demand will
be fueled by these buildouts. With SBC as a 10%
customer in the recent quarter, Tellabs is in a good
position to benefit from this additional demand.
Raised Estimates to Reflect Continued Strong Business Fundamentals
We have raised our rounded 1999 and 2000 EPS
estimates by 5¢ each to $1.35 and $1.70,
respectively. (Our single-point estimates are $1.33
and $1.68.) Our fourth-quarter estimate is up a
penny to 40¢ and our 2000 quarterly progression is
34¢, 40¢, 42¢ and 52¢. Tellabs estimates have risen
steadily, and even with the recent stock split, it
appears that most estimates will rise by a nickel.
Revenue, EPS, and Backlog All at Record Levels
Tellabs reported September-quarter revenues of
$594.5 million, well ahead of our $580.0-million
estimate, up 39% from a year ago and 10%
sequentially. The revenue upside was driven by
TITAN again this quarter, which most investors
expected. Domestic sales accounted for two-thirds
of revenues this quarter. EPS of 34¢, excluding
nonrecurring items, were ahead of our 32¢ estimate
and consensus of 33¢; however, we do believe that it
was in line with some unpublished expectations.
Visibility for the December quarter is excellent, we
think. The backlog was described as very strong; the
increase in backlog was much greater than the
sequential revenue increase.
Strong TITAN Cross-Connect Sales Expected to Continue
Broadband buildouts are driving sales of TITAN;
sales rose 43% year over year to $334 million. Sales
of the flagship TITAN 5500 grew 45% a year ago
and broke $300 million this quarter; we had forecast
$280 million in sales this quarter. New
system shipments continue to grow this quarter;
Tellabs has an installed base of 2,500 systems now.
Expansions and upgrades were about 70% of TITAN
shipments this quarter. The 2,000-port system is
finally starting to be meaningful and TITAN
software sales rose as a percentage, too. No big
customer news; major customers still include SBC
(including PacBell and now Ameritech), Bell
Atlantic, U S WEST and AT&T Local Services.
Apparently, a few TITANs have made their way into
AT&T's backbone network. Overall, RBOCs and
IXCs account for about half of TITAN sales.
Martis Sales Were Depressed by Currency Issues
Martis DXX sales of $104 million were not as bad
as most had feared; about $8 million of the shortfall
was due to currency impact. Excluding the currency
impact, shipments would have grown double-digits
year over year. Tellabs added 8 new Martis
customers this quarter, bringing the total to 180
customers. Ericsson sales of Martis were flat year
over year, representing $11 million of sales. Given
the disappointments in Ericsson's sales level, Tellabs
is moving directly into many Martis accounts.
Martis revenue is expected to post double-digit
sequential growth in the December quarter. Longer
term, we assume single-digit growth for the Martis
business, given its TDM nature. Of course, as
Tellabs blends the faster-growing NKT unit with
Martis (by next quarter Martis sales will not be
broken out), investors will focus on the upgrade
cycle as NKT's SDH products are sold into the
Martis installed base.
Echo canceller sales of $64 million increased 26%
year over year. The NKT acquisition posted strong
sales, contributing $20 million of revenues to the
division. Overall TITAN, Martis DXX, and echo
canceller sales accounted for 85% of total revenues,
slightly down from 86% in the prior quarter and
89% a year ago. In 2000, as new products such as
NetCore and CableSpan begin to ramp, this
concentration should decline further.
CableSpan Remains Significant Opportunity for 2000
CableSpan reported revenues of $28 million this
quarter, up almost four fold from $7.4 million a year
ago. UPC in Europe and MediaOne remain
Tellabs's main customers for this product, although
RCN is apparently ramping as well. CableSpan is
just beginning to be installed at AT&T; we think
AT&T could contribute at least $40 million of
revenues in 2000. CableSpan revenue is expected to
grow significantly next quarter and in 2000; another
five to six customers are currently trialing the
product.
Gross margin of 59.0% was lower than our
estimated 60.0%, impacted by the increased level of
CableSpan sales, which carries a gross margin lower
than the corporate average at this time, as well as by
the NKT consolidation. Gross margin did rise from
57.9% a year ago due to an improvement in
manufacturing and lower customer service expenses.
If CableSpan ramps as planned in 2000, gross
margin probably will not be able to break through
the 59%-60% level. On the expense front, SG&A
declined sequentially to $75.5 million, down from
$79.6 million in the prior quarter, partly due to the
reduction in stock appreciation rights expense since
the stock price has declined from last quarter.
Operating margins are holding well at about 33%;
they can probably rise a bit further as spending will
not grow as fast as sales from here.
Balance Sheet Metrics Were Positive
Net cash increased $42 million to $924 million this
quarter, after the $110-million NKT purchase. Cash
was generated from operations but was also helped
by the sale of some AFC shares and the increase in
the marked-to-market value of the remaining AFC
shares. Inventory turns improved to 6.6 times from
6.3 in the prior quarter. Days sales' outstanding
(DSOs) increased to 79 days from 77 in the prior
quarter. The addition of all NKT's receivables
against a partial quarter of sales affected DSOs by
three days, however, so there was a little
improvement excluding NKT. Nevertheless,
management intends to try to bring the DSOs back
down near term.
With superior earnings visibility and an unusually
strong December-quarter backlog, Tellabs remains a
favorite stock for us. We think the recent stall in the
stock is a good opportunity for investors that want
year-end earnings certainty. Investors continue to
worry about the longer-term future of the cross
connect as traditional electronic network elements
give way to new hybrid products and optical
versions. Someday, of course, we should see a shift
toward a new class of transport products, but for at
least the next year, carriers are loading up on their
traditional gear to accommodate the data wave.
Tellabs is a primary beneficiary of the growth in
data traffic, and the new access technologies will
simply feed the need for more transport bandwidth.
We continue to recommend purchase of Tellabs
shares. |
