Q & A
Investors ask: What's ahead for Tellabs?
CEO Robert W. Pullen answers investors' frequently asked questions.
Q. Given the ongoing financial turmoil, what is your outlook?
A. Tellabs has made significant strides in areas we control, such as operating expenses.
What we can't control is service providers' capital spending, which many customers have stated they are curtailing. To address that concern, our strategy pinpoints addressable markets that are growing faster than overall capital spending — mobile backhaul, optical networking and business services. We're also adding resources outside North America, where almost 80% of capital spending occurs. Whatever revenue 2009 brings, our goals are to continue generating cash as well as operating income.
Q. How can your plans for growth in target markets succeed?
A. We have carefully selected markets where Tellabs has successfully innovated and where we have strong customer relationships. For instance, in mobile backhaul, we were first to market with a solution that offers customers a lower total cost of ownership as they migrate to 3G and 4G networks. We were able to anticipate our mobile customers' needs because we've been working with them for 20 years to increase their revenue and lower their expenses. Similarly, we offer differentiated solutions with quantifiable benefits in all our addressable markets. That said, we fully recognize that we need to keep innovating every day to stay ahead.
Q. What is your strategy for growing the services business?
A. We're focused on consulting services that help customers solve their business challenges. During 2008, we provided professional services for about 200 projects around the world, including network optimization, business case analysis and network performance enhancements. Although professional services are a small portion of our services business today, this revenue is growing substantially and profitably. Our professional services add value for customers and differentiate Tellabs from competitors.
Q. Tellabs has $1.15 billion in cash and equivalents. How do you intend to use it? Are you planning a merger or acquisition, given some very attractive valuations?
A. Thanks to the prudent decisions by our board of directors and leadership, Tellabs is fortunate to have a solid balance sheet with cash, cash equivalents and marketable securities, and no debt. Customers prefer to do business with financially solid suppliers.
We intend to grow Tellabs organically. You might see us opportunistically purchase a key technology to gain a timing advantage, but we would pursue a merger or acquisition only if it clearly adds value for our customers and shareowners. That said, we have no imminent plans in this area.
Q. How will you continue to improve the gross profit margins of Tellabs products?
A. Our gross margins improved three percentage points to 38.2% during 2008. For instance, we've improved gross margins on the Tellabs® 7100 system over the past two years. We'll continue to work on gross margins by aggressively managing down product costs through value engineering, simplifying products with fewer components, sourcing parts at lower costs, reducing product complexity, using fewer suppliers and reducing our inventory items.
Q. Is your core business declining? What effect will tough times have on core products?
A. Since our core products (Tellabs® 1000, 3000, 5000 and 8100 series) are later in their life cycles, they'll likely decline over time. Our strategy is to pursue growth products and services in order to counterbalance this anticipated decline.
During tough times, different customers will take different approaches. As they tighten their belts, some will try to squeeze more out of existing assets, which is good for our core products. Others will accelerate the adoption of new technologies to reduce their capital and operating expenses, which is good for our growth products.
Q. You recently added Dr. Vikram Saksena, chief technology officer (CTO), Rizwan Khan, executive vice president of global marketing, and Roger J. Heinz, executive vice president of global sales and services, to Tellabs' executive team. Why?
A. To successfully innovate for customers and gain a competitive edge, we have to detect technology trends and market opportunities well before they unfold. That's why we need experienced top-level executives who specifically focus on technology and on the marketplace. These key roles look at our business from the outside in, taking a longer-term global view of how best to position Tellabs for the future. We plan to innovate, market and sell our way through the downturn, so we can emerge even stronger on the other side. Our new executives complement a strong existing leadership team. (See biographies of the Tellabs leadership team.)