Tellabs CEO Agrees With '99 View; Sees 30% Growth in '00
By Ann Keeton
11/19/1999
Dow Jones News Service
CHICAGO -(Dow Jones)- Tellabs Inc. (TLAB) President and Chief Executive Michael Birck said he's comfortable with analysts' projections the company will earn 40 cents a share in the fourth quarter and $1.32 for all of 1999.
That would give the company a 34% earnings increase for the year.
The consensus estimate comes from 28 analysts monitored by First Call/Thomson Financial.
In an interview with Dow Jones Newswires, Birck said he expects Tellabs to post similar results next year. "We plan for 30% top line and bottom line growth in 2000," he said. The company expects to reach sales of $2 billion next year.
The consensus of analysts sees 27.3% earnings growth in 2000, with an annual average growth rate of 30% for the next five years.
Those strong numbers are expected to come both from the booming communications industry and Tellabs' ability to stay in the hunt with a strong lineup of products.
Tellabs' stock traded recently at 77 3/16, topping the the year high of 74 set in July.
The suburban-Chicago company makes communications equipment and provides network services for wired, wireless and cable communications companies. Customers include telecom giants such as MCI Worldcom Inc. (WCOM) and SBC Communications Inc. (SBC) as well as smaller new companies. "We hope AT&T (now the second-largest cable television company in the U.S.) will become a big customer for us," Birck said.
Traditional carriers send data, voice and video transmissions to business and residential customers. Data transmission over the Internet has quickly become the fastest growing part of the communications business.
The industry is in flux on several levels. Customers are demanding an array of new products to upgrade or change their systems to transmit vast amounts of data at extremely high speed. At the same time, the players themselves are constantly changing.
"Our industry is consolidating rapidly," Birck said. "Both the customers and the suppliers are consolidating at about the same rate. That means that bigger suppliers are working with bigger customers." Because Tellabs is small compared to competitors such as Lucent Technologies (LU), Birck said "we can't always expect to to be first with new products. We're not cutting back on our commitment to product development," he said. "But we have a new focus this year on customer service."
Paul Silverstein, an analyst with Robertson Stephens in New York, said that's a sound strategy. "Service may be a small part of the picture, but at many of the emerging companies, and some of the big companies, there's a lack of experienced executives to put together networking systems."
"There is a concern that you need some critical mass to work with big customers," said Ted Moreau, an analyst with Robert W. Baird in Milwaukee. But, he said, Tellabs has good relationships with big carriers, who will continue to upgrade their systems with Tellabs equipment. In addition, he said, "according to FCC figures, emerging communications companies are coming into the U.S. market at a rate of two per week, and Tellabs is also getting some of that business."
New Products Key To Long-Term Success
Moreau said 2000 is a pivotal year for Tellabs. The company's continued success as a niche player hinges on getting new products in customers' hands next year, the analyst believes.
"Tellabs has been a market leader in niche technology with its Titan systems," Moreau said. In fact, the Titan digital cross-connect system continues to lead all the company's products in sales growth, with a 43% increase in the third quarter of this year.
But the industry is moving rapidly to the next level of technology. Moreau said Tellabs will need to have a strong presence in selling optical switches for use with fiber-optic networks. Along with its competitors, Tellabs now sells electrical switches based on copper wire technology. As well, Tellabs will need to focus on packet switches to accommodate multi-use transmission lines, Moreau said. Those lines are replacing many of the dedicated lines which use the older circuit switch technology.
"Tellabs will have to show that they can make the move into newer technology. I'm betting that they will be successful," Moreau said.
Silverstein at Robertson Stephens said as long as Titan products continue to sell well, Tellabs will have some time to get new products to market. "Titan owns 47% of the digital cross connect market. There's been a question for some time as to how long that technology will be around. The euphemism in the industry is that they're the 'cockroaches' - they're everywhere and they won't go away. Titan accounts for 55% to 65% of Tellab's revenues, so if sales growth falls off, that would a problem."
The analyst said Cablespan, a product used by cable television companies such as AT&T to send both video and telephone signals through their systems, looks like a winner. "Two quarters ago, revenues from Cablespan were less than $10 million. In 2000, I think it will account for more than $200 million." He added that it isn't clear how well some of the company's other new products will pan out. "In the past, they stumbled on a few things."
Birck said Tellabs is working to develop all-optical switches, seen by the market as a key future technology. "We won't be ready with them in 2000, but I'm not sure that any of our competitors will be, either."
Two-thirds of the company's business is in North America, which will continue to be the company's major growth market, Birck said. Problems with local economies make business growth in Asia and Latin America less predictable, he said. "But there is huge potential there. "
He said the company sees opportunities in China, where it has sales offices in Beijing and Shanghai. "It's almost impossible to be in the telecommunications business in China if you don't have a Chinese business partner," he said. He said the company will actively pursue joint venture opportunities to become a player in the Chinese market.
Tellabs has made three acquisitions so far this year, and is negotiating to add one more before the year is over, Birck said. "All the acquisitions have been smaller companies, in the $100 million to $300 million range. We could buy a large company, but it's hard to find the right fit." With strong emphasis, he added, "mergers with equals don't work."
Tellabs emerged unscathed from a failed merger last year with Ciena Corp. (CIEN), a competitor in the fiber-optical equipment business. Rumors recently surfaced concerning renewed merger talks. "I talk with them whenever we're at analysts' conferences," Birck said, but he said the conversation hasn't included any suggestions of a merger.
Asked whether Tellabs could itself become a takeover target, Birck said. "Our market cap is $26 billion to $27 billion. If a company were to acquire us, they would have to pay a substantial premium over book value - and a $30 to $40 billion acquisition is pretty steep. If something bad happened and our stock price dropped by half, then we might be a takeover target." |
