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Technology Stocks : TLAB info? -- Ignore unavailable to you. Want to Upgrade?

To: John Carragher who wrote (5918)	8/3/1999 10:35:00 PM
From: A. Edwards	Respond to of 7342

Tellabs Inc: Solid Business Outlook Merrill Lynch & Co. 3 August 1999 Michael E. Ching Timothy P. Long Reason for Report: Meeting With Management Highlights from Meeting with Management Yesterday, we had a meeting with Peter Guglielmi, Executive Vice President and Chief Financial Officer of Tellabs. At the meeting, a key message was reiterated: demand for the company's TITAN product line remains strong, while the outlook for new products continues to improve. We are currently forecasting that TITAN revenues increase by 34% in 1999 and 25% in 2000, driven by sales of the TITAN 5500. Sales of port cards for upgrades have also been particularly strong, and have had a favorable impact on gross margins. We estimate that about 65% TITAN sales are for the upgrade of existing networks. Upgrades could represent a higher percentage of sales going forward as the embedded base continues to grow. The outlook for TITAN continues to be favorable given the number of new models the company is introducing. Three new TITAN models are the 6500 Broadband Transport Manager (BTM), the 6100 Optical Transport Systems (OTS), and the TITAN 4500 Gateway Exchange. These products could represent more than $100 million in revenues in 2000. We are most optimistic about the BTM, which should go into trial in the December quarter and ship in volumes in the June 2000 quarter. Several operators have expressed interest, although Tellabs will likely only hold two or three trials. The company believes it can record revenues of over $50 million in 2000 with only three customers, although it believes it could have eight or nine by the end of next year. Another new product whose outlook is improving is the Cablespan cable telephony product. We believe testing of the product at AT&T/TCI is nearing completion. We expect Cablespan revenues to double to $75 million in 2000. This estimate could be conservative if AT&T is signed as a customer. Additionally, gross margins have improved faster than we anticipated. Gross margins are already in the low 40s versus the mid-20s three months ago. Deployment of the AN2100 Gateway Exchange, which was specifically designed with Sprint, has been hampered by some issues with other elements of the ION network. However, shipments to Sprint could accelerate once these network issues are resolved. Furthermore, the company is introducing the GX version of the AN2100 which can be used by other operators. We believe the AN2100 could represent $75-$100 million in revenues in 2000. In total, new products could represent nearly 10% of Tellabs' revenues in 2000. Combined with robust demand for the TITAN 5500, solid growth in echo cancellers, and a modest rebound in Martis DXX sales, we continue to be positive on the outlook for Tellabs.