Tellabs CEO Discusses Q4 2010 Earnings Call Transcript

Tellabs (TLAB)

Q4 2010 Earnings Call

January 25, 2011 8:30 am ET

Executives

Tom Scottino -

Robert Pullen - Chief Executive Officer, President and Director

Timothy Wiggins - Chief Financial Officer and Executive Vice President

Analysts

Nikos Theodosopoulos - UBS Investment Bank

Blair King - Avondale Partners, LLC

Thomas Lee - Goldman Sachs

Joseph Longobardi

Rod Hall - JP Morgan Chase & Co

Jeffrey Kvaal - Barclays Capital

Ehud Gelblum - Morgan Stanley

Simon Leopold - Morgan Keegan & Company, Inc.

Alex Henderson - Miller Tabak & Co., LLC

Michael Genovese - Citigroup

Presentation

Operator

Good morning, my name is Susan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tellabs' Investor Relations Conference Call. [Operator Instructions] Mr. Tom Scottino, you may begin your conference.

Tom Scottino

Thank you, Susan, and good morning, everyone. With me today are Tellabs' CEO, Rob Pullen; and our Executive Vice President and CFO, Tim Wiggins. If you haven't seen the news release we issued this morning, you can access it at our tellabs.com website.

Before we begin, I'd like to remind you that this presentation contains forward-looking statements about future results, performance or achievements financial and otherwise. These statements reflect management's current expectations, estimates and assumptions. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that may cause Tellabs' actual results, performance or achievements to be materially different. A discussion of the factors that may affect future results is contained in Tellabs' most recent SEC filings. The forward-looking statements made in this presentation are being made as of the time and date of its live presentation. If this presentation is reviewed after the time and date of its live presentation, it may not contain current or accurate information. Tellabs disclaims any obligation to update or revise any forward-looking statement based on new information, future events or otherwise. This presentation may also include non-GAAP financial measures. Reconciliations between non-GAAP financial measures and GAAP financial measures can be found at our tellabs.com website and in our SEC filings. Thank you.

Robert Pullen

Thanks, Tom, and good morning, everyone. The fourth quarter brought revenue growth, but a setback in profitability. Our fourth quarter of 2010 revenue was $410 million, up 5% compared with the fourth quarter of 2009. Our revenue for growth products was strong at 56% for this quarter and compared with 48% in the fourth quarter of 2009.

Our fourth quarter 2010 data of revenue rose 8% by comparison with the third quarter of 2010 and 33% compared with the fourth quarter of 2009. Data revenue for multiple international carriers more than offset weaknesses in North America. In fact, our international mobile data reached an all-time high in the fourth quarter of 2010. On a GAAP basis, we lost $11 million or $0.03 per share in the fourth quarter. On a non-GAAP basis, we earned $0.02 per share.

Fourth quarter, in the revenue, was within our guidance range. But we wanted to share with you also some modifications we've had. We have early adopted two required revenue recognition rules to better reflect the economics of our multiyear deals that we already entered into. And that increased the revenue of about $9 million. Our fourth quarter revenue also reflected our agreement with the North American customers to add our data products to other products already sold to the customer through distributor. This chain decreased our revenue by about $21 million. The fourth quarter international revenue was 41% of our overall revenue. That was up from 31% in the third quarter. This is a positive trend as we diversify our global customer base.

Our fourth quarter GAAP gross margin was 38%. This includes a pretax charge of $16.5 million related to a canceled tender in India. Excluding this charge, our gross margin would have been 42%, within the guidance range that we gave you. Tim will give you more detail on this chart in a moment.

Looking to our guidance for the third quarter, we expect revenue to be in the range of $315 million to $335 million. We expect non-GAAP gross margin to be 40%, plus or minus two points, again depending on product mix.

We expect non-GAAP operating expenses to be slightly down and probably in the high 140s. Obviously, we're disappointed in our fourth quarter results and our guidance for the first quarter. After three quarters of strong performance in 2010, we certainly do not want to end the year this way.

During the first three quarters of last year, our revenue and profits were driven by growth in Digital Cross-Connect and our data products, dominantly for Mobile Backhaul and primarily in North America. In the fourth quarter, our Digital Cross-Connect and data revenue in North America declined. As a result, our revenue declined sequentially in the fourth quarter and will decline again in the first quarter. That's the outlook as we see it today, and we'll certainly work hard to improve it.

Despite lower revenue in North America, our fourth quarter data revenue grew, both sequentially and on a year-over-year basis. We won 21 new customers for our data products and generated higher revenue from our SmartCore platform. It was all positive signs in the fourth quarter. This increase investment we've made in sales and services resources outside of North America since 2008 is delivering new customers. Last year in 2010, we won 87 new customers for our growth products.

Customers continue to embrace Tellabs growth products during the fourth quarter. The Tellabs 8600 and 8800 systems gained 15 new customers during the fourth quarter, two in North America and 13 in the international markets. The Tellabs 9100 SmartCore platform gained six new customers in the fourth quarter, two in North America and four in international markets. The Tellabs 7100 Optical Transport System gained four new international customers during the fourth quarter.

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