ANOTHER ELEMENT TO TELLABS' GROWING DATA PRODUCT PORTFOLIO:
Prudential Securities
December 23, 1999
Analyst: John H. Butler (212) 778-1488
Yesterday, Tellabs announced its intent to acquire SALIX, a privately-held "class independent" switch vendor, for $300 MM in stock. This acquisition is expected to close by the end of January, 2000. SALIX Technologies has developed a "class independent" switch which is optimally designed to ease a carrier's migration from a circuit-switched voice network architecture to a packet-switched architecture. Specifically, SALIX's ETX5000 switch integrates both circuit and packet switching capabilities and as such, can support both Sonet-based TDM traffic as well as newer packet-switched voice and data. For example, Salix's ETX5000 can support voice-over-ATM, voice-over-IP as well as Internetservices. The ETX5000 can also be used by carriers to run packet-based traffic (ATM, IP, etc.) over their existing Sonet networks. As discussed in greater detail below, we are very positive on this acquisition because the SALIX's ETX5000 is well matched with Tellabs' terabit router and access products. Moreover, the addition of this new product lends further depth to Tellabs' growing portfolio of carrier class data network elements.
SALIX represents a good fit with Tellabs' product portfolio which is an important element of its rationale for acquiring the company. Over the past 6 months, Tellabs stock has languished relative to the rest of the sector because the company has lacked a clearly defined data product roadmap. In our view, this perception is not altogether accurate. Tellabs acquired a very good terabit router product (called Everest) from NetCore earlier this year. Moreover, Tellabs is nearing completion on its new TITAN 6500 system which is an ATM-based cross-connect which is optimized to manage both voice and data traffic on the public network. Tellabs is also in the late stages of developing a metro dense wave division multiplexing (DWDM) product line. With the addition of SALIX's "class independent" switch, Tellabs now has the ability to market an even broader range of carrier class data network elements. Moreover, Tellabs has a lot to offer SALIX in the way of digital signal processing and echo cancellation technology, which should aid in future feature enhancements on the ETX5000. But Tellabs not only intends to build on SALIX's core technology, it intends to pair it with its existing products such as NetCore's Everest router, the Martis DXX system as well as its broad line of echo cancellers. So with this acquisition, Tellabs' is one step closer to firming up its data networking product line and therefore its "data" story. As sales of all of these new products begin to ramp as we progress through 2000, we expect Tellabs' stock to trend up on rising investor confidence.
In summary, we are positive on this latest acquisition and continue to view Tellabs' as a good story. Beyond its growing portfolio of carrier class data products, we expect Tellabs' core business to continue to experience strong growth. The company has done an excellent job of expanding the feature set on its core TITAN 5500 wideband digital cross connect.
The expected strength in this core product line next year, coupled with the growing promise of new products should make for a very compelling story next year. As a result, we continue to rate the shares of Tellabs Strong Buy with a 12-month target of $90. |
