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

To: Research Week who wrote (4379)	11/15/1998 8:59:00 PM
From: Brien Koehler	Respond to of 7342

researchweek.com Tellabs, Inc. November 16, 1998 Tellabs, Inc. designs, manufactures, markets and services voice, data and video transport access systems that are used worldwide by public telephone companies, long-distance carriers, alternate service providers, cellular and other wireless service providers, cable operators, government agencies, utilities and business end-users. Major product lines include fiber optic systems, digital cross-connect systems, managed digital networks, and network access systems. HIGHLIGHTS For the third quarter ended October 2, 1998, Tellabs reported record revenues of $423.5 million (the best quarter in the company's history), up 36.9% over the year ago quarter. Net income of $87.76 million was up 36.5% ($0.46 per share). October 26, 1998 U.K. operator Cellnet (the biggest digital network in Great Britain - 99% of the population) deployed Tellab's EC Duo 8000 echo cancellers in 13 switching sites. This breakthrough product for mobile and landline networks distinguish between background noise and voice to effectively amplify the callers voice and normal conversation levels and eliminates all forms of echo. ** 10/29/98 Tellabs will supply it's MartisDXX managed access and transport network solution to the Bejing Telecommunications Administration in China. BTA has determined that the MartisDXX system and it's record for reliability is exactly what is needed to keep real-time centralized control as BTA builds up a dedicated network in China. OVERVIEW Tellabs, Inc. has experienced remarkable growth during it's relatively short history (founded in 1975). With seemingly insatiable worldwide demand for communications, the company is aggressively persuing it's goal of $2 billion in revenues by the year 2000. Todays telecommunications environment, characterized by technological and regulatory change with increasing competition and service demand, challenges the company to address access issues ( transition of providers to compete in local and long-distance) as well as the traditional transport area of the industry. The company's stock has provided the best 5-year annualized return (91.3%) of any stock listed in the S&P 500. To maintain this performance, the company spends approximately 13% of revenues on R&D (about 30% more than it's competitors), and maintains 11 development centers and 4 manufacturing facilities (Illinois, Texas, Ireland, Finland). With an extensive network of international distributors and partners, customers are serviced by 30 regional sales and service centers around the world. The company separates itself from the competition by being able to deliver large-scale systems within tight time constraints. A multi-million dollar custom system can be manufactured and delivered within a matter of weeks. The TITAN family of products (capable of carrying 1.4 million simultaneous telephone calls) consists of sophisticated digital cross-connect systems and network management platforms for local, long-distance, cellular and cable providers as well as government and Fortune 500 companies. This flagship product (60% of sales) is used to build and control transmission infrastructures and provide centralized and remote testing, grooming of signals, automated provisioning of new services and restoration of failed facilities. In the data communications marketplace the MartisDXX system provides managed digital networks for applications in analog and digital cellular, paging, voice, data and messaging services. The company also makes digital signal processing products (echo cancellors and line amplifiers) as well as local-access products (the CABLESPAN 2300 system allows cable system operators to offer telephone services). In a world where half the world's population has never spoken on the telephone, Tellabs remains committed to remain ahead of the technology curve and integrate the best new products into it's customer's systems. INVESTMENT SUMMARY We are initiating coverage of Tellabs, Inc. with a Strong Buy recommendation. Our 12-18 month price target is $82. The company's excellent performance is reflected by gross margins of 60% and inventory turns of approximately 5. Coming off of the best quarter in the company's history, nine month earnings for 1998 were up 45% to $1.45 per share compared to the year earlier period of $1.00 per share. Earnings are estimated at $1.95 for 1998 and $2.50 for 1999 on revenues of $2.2 billion. The company expects spending on transmission and access products to increase 15% in 1999 and CLEC(Competitive Local Exchange Carrier) spending to increase by 40%. Results are driven primarily by strong sales of flagship products TITAN 5500 and MartisDXX (up 34% and 29% respectively). Echo canceller sales were up 153%, augmented by the merger with Coherent Communications Systems completed August 3, 1998. The company's planned merger with CIENA Corp. (the market leader in wavelength division multiplexing - WDM) was called off after key CIENA contracts fell through (AT&T and Digital Teleport). The new Broadband Transport Manager (BTM - the successor to the TITAN product family) is a next-generation cross-connect that will support both SONET (large circuit platforms) and emerging ATM (packet/cell) networks that will convert voice to data traffic and perform compression, statistical multiplexing, and echo cancellation. Management expects this to offset the slowdown of TITAN products over the next 2 years. With it's largest backlog of orders ever, we expect demand for Tellab's products to increase with the trend toward more bandwidth intensive services and increasing local carrier competition. In closing, we are initiating coverage of Tellabs, Inc. with a Strong Buy rating.