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TLAB > SEC Filings for TLAB > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for TELLABS INC

Form 10-Q for TELLABS INC


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition

Introduction and Overview of Business

Tellabs designs, develops and supports telecommunications networking products. We generate revenue principally through the sale of these products to communications service providers worldwide as both stand-alone network elements and as elements of solutions integrated under a common network management system. We also generate revenue by providing services to our customers.

Prior to the second quarter of 2012, Tellabs reported results of operations for three reporting segments: Broadband, Transport, and Services. As a result of strategy changes and internal reorganizations at the beginning of the second quarter of 2012, Tellabs is focusing on the growth markets of Packet Optical (primarily our optical portfolio) and Mobile Backhaul (primarily our data portfolio) in addition to the on-going Access and Services businesses. With these strategic adjustments, we changed our reporting segments accordingly. Therefore, beginning with the second quarter of 2012, we have reported in the following four segments: Optical, Data, Access and Services (the Services segment is unchanged).

Optical segment products are primarily used to manage large volumes of telecommunication traffic in metro areas. The Optical segment includes the Tellabs® 7000 series of optical transport systems, as well as the Tellabs® 5000 and 6300 series of transport systems equipped with optical interfaces.

Data segment products are primarily used in mobile backhaul applications, and for business services and various edge routing applications. The Data segment includes the Tellabs® 8600, 8800 and 9200 Smart Routers, as well as the Tellabs ® 8100 Managed Access Systems.

Access segment products are primarily used to enable service providers to bundle Internet, video, and voice over high-speed fiber-based networks and in Optical LAN applications. The Access segment includes the Tellabs® 1000 and 1100 Multi-service Access systems, and the Tellabs ® 1600 Optical Network Terminals.

The Services segment includes services that support all phases of the network:
planning, building and operating. The Services segment includes deployment, support, training and professional services for customers of the Optical, Data and Access segments.

Tellabs continues to develop new products and services that are primarily funded by profits from earlier-developed products and services. As customers migrate to new technologies, revenue from earlier-developed products and services declines and overall corporate profitability suffers. This situation is compounded when customers are slow to adopt our new products and services. In the face of these market conditions, we continue to transform the company, streamlining costs, sales and marketing, and general and administrative expenses, so that we can increase investment in research and development for future growth with the near-term goal of maintaining nominal profitability on a non-GAAP basis and generating positive cash flow from operations.

RESULTS OF OPERATIONS

Net loss in the third quarter of 2012 was $3.9 million or $0.01 per share (basic and diluted), compared with net loss of $130.1 million or $0.36 per share (basic and diluted) in the third quarter of 2011 when results included $102.7 million in impairment charges for goodwill and in-process research and development (IPR&D). For the first nine months of 2012, net loss was $148.4 million or $0.40 per share (basic and diluted), compared with net loss of $183.5 million or $0.50 per share (basic and diluted) in the first nine months of 2011. Lower operating expenses, offset by lower gross profit margins, reduced the net loss in the third quarter of 2012, compared with the year-ago period. The net loss in the first nine months of 2012 was driven primarily by lower overall revenue and $110.2 million in restructuring and other charges incurred in the first nine months of 2012.


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Revenue (in millions)



                                Third Quarter                          Nine Months
                        2012        2011       Change         2012        2011       Change
       Products        $ 216.5     $ 272.7       (20.6 )%    $ 663.6     $ 804.6       (17.5 )%
       Services           47.9        57.1       (16.1 )%      146.8       164.3       (10.7 )%

       Total revenue   $ 264.4     $ 329.8       (19.8 )%    $ 810.4     $ 968.9       (16.4 )%

Third quarter 2012 compared with third quarter 2011

Total revenue was $264.4 million, compared with $329.8 million, as revenue declined in each operating segment. On a geographic basis, revenue from customers outside North America was $138.1 million (or 52% of total revenue), compared with $178.8 million (or 54% of total revenue), as revenue declined in all geographic regions outside North America. Revenue from customers in North America (United States and Canada) was $126.3 million (or 48% of total revenue), compared with $151.0 million (or 46% of total revenue).

First nine months of 2012 compared with first nine months of 2011

Total revenue was $810.4 million, compared with $968.9 million, as revenue declined in each operating segment. On a geographic basis, revenue from customers outside North America was $419.6 million (or 52% of total revenue) compared with $465.6 million (or 48% of total revenue) as increased revenue in the Latin America Caribbean (LAC) region was offset by lower revenue in the Europe, Middle East, Africa (EMEA) and Asia Pacific (APAC) regions. Revenue from customers in North America was $390.8 million (or 48% of total revenue), compared with $503.3 million (or 52% of total revenue), primarily as a result of lower revenue from Tier 1 customers.

Gross Margin



                               Third Quarter                            Nine Months
                                              % Point                                 % Point
                      2012        2011        Change          2012        2011        Change
      Products         40.8 %      41.8 %         (1.0 )%      40.2 %      39.9 %          0.3 %
      Services         31.7 %      39.1 %         (7.4 )%      31.8 %      32.1 %         (0.3 )%
      Consolidated     39.2 %      41.3 %         (2.1 )%      38.7 %      38.6 %          0.1 %

Product gross margins declined in the third quarter of 2012, compared with the third quarter of 2011, primarily as a result of lower revenue from Data segment products. Product margins increased slightly in the first nine months of 2012, compared with the first nine months of 2011, as lower costs offset the lower level of overall product revenue.

Services margins declined in the third quarter 2012, compared with the third quarter of 2011, primarily as a result of lower revenue from professional services. Services margins declined in the first nine months of 2012, compared with the first nine months of 2011, primarily as a result of lower revenue from professional services and partially driven by an adjustment for business taxes on sales transactions involving deployment services in a foreign jurisdiction in the second quarter of 2012.

Operating Expenses (in millions)



                                            Third Quarter                  Percent of Revenue
                                    2012        2011        Change         2012            2011
 Research and development          $  53.7     $  80.8     $  (27.1 )         20.3 %        24.5 %
 Sales and marketing                  29.7        41.4        (11.7 )         11.2 %        12.6 %
 General and administrative           17.9        18.6         (0.7 )          6.8 %         5.6 %

 Subtotal                            101.3       140.8        (39.5 )         38.3 %        42.7 %

 Intangible asset amortization         1.1         5.0         (3.9 )
 Restructuring and other charges       3.3        19.5        (16.2 )
 Goodwill and IPR&D impairment          -        102.7       (102.7 )

 Total operating expenses          $ 105.7     $ 268.0     $ (162.3 )


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                                             Nine Months                   Percent of Revenue
                                    2012        2011        Change         2012            2011
 Research and development          $ 179.4     $ 244.6     $  (65.2 )         22.1 %        25.2 %
 Sales and marketing                  98.3       126.9        (28.6 )         12.1 %        13.1 %
 General and administrative           58.7        63.3         (4.6 )          7.2 %         6.5 %

 Subtotal                            336.4       434.8        (98.4 )         41.5 %        44.9 %

 Intangible asset amortization         4.3        15.3        (11.0 )
 Restructuring and other charges     110.2        20.5         89.7
 Goodwill and IPR&D impairment          -        102.7       (102.7 )

 Total operating expenses          $ 450.9     $ 573.3     $ (122.4 )

In the third quarter of 2012, operating expenses decreased, compared with the year-ago period, due primarily to the $102.7 million impairment charge for goodwill and IPR&D in 2011, as well as lower research and development and sales and marketing expenses related to stopping new development of mobile packet-core products.

For the first nine months of 2012, lower research and development, sales and marketing and general and administrative expenses were partially offset by $110.2 million in restructuring and other charges incurred in the first nine months of 2012. Restructuring and other charges in the third quarter of 2012 are due to severance ($2.3 million) and facility- and asset-related charges ($1.0 million). For the first nine months of 2012, restructuring and other charges are due to facility- and asset-related charges ($38.2 million), severance ($24.3 million) and accelerated amortization for abandoned intangible assets ($47.7 million) related to the mobile packet-core technology.

Other Income (in millions)



                                     Third Quarter                         Nine Months
                             2012        2011       Change        2012        2011       Change
     Interest income, net   $  2.1      $  3.0      $  (0.9 )    $  5.5      $  9.4      $  (3.9 )
     Other expense, net       (0.2 )      (0.9 )        0.7        (2.3 )      (2.6 )        0.3

     Total other income     $  1.9      $  2.1      $  (0.2 )    $  3.2      $  6.8      $  (3.6 )

Interest income was down in the third quarter and first nine months of 2012, compared with the year-ago periods, due to lower interest rates and lower investment balances. Other expense, net was lower in the third quarter of 2012, compared with the third quarter of 2011, primarily due to a $0.6 million write-down of long-term equity investments in the third quarter of 2011. Other expense, net for the first nine months of 2012 primarily consisted of increased costs related to hedging foreign-currency exposures. Other expense, net for the first nine months of 2011 primarily included a $1.8 million charge for other-than-temporary impairments from investments in marketable securities and write-downs of long-term equity investments.

Income Taxes

In the third quarter of 2012, we reported tax expense of $3.7 million, compared with tax expense of $0.5 million in the third quarter of 2011. For the first nine months of 2012, we reported tax expense of $14.2 million, compared with a tax benefit of $9.2 million for the first nine months of 2011. While we were able to partially recognize tax benefits on domestic losses in 2011, we established a valuation allowance in 2011 for the remaining domestic losses. We did not recognize tax benefits on domestic losses in 2012 as it is more likely than not that they will not be realized. As a result, tax expenses for the third quarter and the first nine months of 2012 primarily reflect tax on income from foreign operations.

Segments

We operate in four business segments: Optical, Data, Access and Services.

Segment Revenue (in millions)



                                Third Quarter                          Nine Months
                        2012        2011       Change         2012        2011       Change
       Optical         $ 108.0     $ 120.4       (10.3 )%    $ 334.8     $ 368.8        (9.2 )%
       Data               66.2       109.1       (39.3 )%      213.3       312.7       (31.8 )%
       Access             42.3        43.2        (2.1 )%      115.5       123.1        (6.2 )%
       Services           47.9        57.1       (16.1 )%      146.8       164.3       (10.7 )%

       Total revenue   $ 264.4     $ 329.8       (19.8 )%    $ 810.4     $ 968.9       (16.4 )%


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Segment Profit (Loss)* (in millions)

                                   Third Quarter                         Nine Months
                            2012       2011      Change         2012        2011        Change
    Optical                $ 23.5     $ 20.6        14.1 %     $  67.3     $  67.1          0.3 %
    Data                      1.4        8.0       (82.5 )%        1.8        (7.8 )        N/M
    Access                   11.1        7.2        54.2 %        23.5        26.6        (11.7 )%
    Services                 15.6       22.8       (31.6 )%       48.0        54.4        (11.8 )%

    Total segment profit   $ 51.6     $ 58.6       (11.9 )%    $ 140.6     $ 140.3          0.2 %

* We define segment profit (loss) as gross profit less research and development expenses. Segment profit (loss) excludes sales and marketing expenses, general and administrative expenses, the amortization of intangibles, restructuring and other charges, the impact of equity-based compensation and the goodwill and IPR&D impairment charges.

Third quarter 2012 compared with third quarter 2011

Optical

Revenue from the Optical segment was $108.0 million, compared with $120.4 million. Within this segment, we saw lower revenue from the Tellabs® 6300 managed transport systems, the Tellabs® 5000 digital cross-connect systems, and the Tellabs® 7100 optical transport systems. Optical segment profit grew to $23.5 million, up 14.1% from $20.6 million, despite the lower revenue level. The improvement in optical segment profitability was primarily driven by lower research and development expenses.

Data

Revenue from the Data segment was $66.2 million, compared with $109.1 million, primarily on lower revenue from the Tellabs® 8100 managed access system and the Tellabs ® 8600 and 8800 smart routers. Data segment profit, driven primarily by the lower revenue level, was $1.4 million, compared with $8.0 million.

Access

Revenue from the Access segment was $42.3 million, compared with $43.2 million. Within this segment, increased revenue from the Tellabs® 1000 access systems was offset by essentially flat revenue from the Tellabs® 1600 single-family Optical Network Terminals (ONTs) and lower revenue from the Tellabs® 1100 access systems. Access segment profit, driven primarily by improved product gross margins and lower research and development expenses, grew to $11.1 million, up 54.2% from $7.2 million.

Services

Revenue from the Services segment was $47.9 million, compared with $57.1 million. The decline in segment revenue was driven primarily by lower revenue from professional services and support agreements. Services segment profit, driven primarily by the lower level of revenue, was $15.6 million, compared with $22.8 million.

First nine months of 2012 compared with first nine months of 2011

Optical

Revenue from the Optical segment was $334.8 million, compared with $368.8 million. Within this segment, increased revenue from the Tellabs 6300 managed transport systems and flat revenue from the Tellabs 7100 optical transport systems was more than offset by lower revenue from the Tellabs 5000 digital cross-connect systems. Optical segment profit, driven primarily by lower research and development expenses was $67.3 million, compared with $67.1 million, despite the lower revenue level.

Data

Revenue from the Data segment was $213.3 million, compared with $312.7 million, primarily on lower revenue from the Tellabs 8600 and 8800 smart routers. Data segment profit was $1.8 million, compared with a loss of $7.8 million. The return to segment profitability, despite the lower level of revenue, was driven primarily by lower research and development expenses related to stopping new development of mobile packet-core products.

Access

Revenue from the Access segment was $115.5 million, compared with $123.1 million. Within this segment, higher revenue from the Tellabs 1600 single-family ONTs was more than offset by lower revenue from the Tellabs 1000 and 1100 access systems. Access segment profit, driven primarily by the lower level of access-system revenue, was $23.5 million, compared with $26.6 million.


Table of Contents

Services

Revenue from the Services segment, driven primarily by lower deployment and professional services revenue and the adjustment for business taxes mentioned earlier, was $146.8 million, compared with $164.3 million. Services segment profit was $48.0 million, compared with $54.4 million. The decline in segment profit was driven primarily by the lower level of revenue.

Financial Condition, Liquidity & Capital Resources

Our principal source of liquidity remained cash, cash equivalents and marketable securities of $941.8 million as of September 28, 2012, which decreased by $34.8 million since year-end 2011. Of the total cash, cash equivalents and marketable securities, as of September 28, 2012, $418.2 million was held in subsidiaries outside the United States and is deemed to be permanently reinvested. We do not currently foresee a need to repatriate funds from our non-U.S. subsidiaries. We could elect to repatriate funds held in one or more foreign jurisdictions. If applicable, withholding taxes could reduce the net amount repatriated. During the quarter, we generated $10.1 million in cash from operations, slightly increasing cash, cash equivalents and marketable securities. We generated $4.5 million in cash from operations during the first nine months of 2012.

During the third quarter of 2012, we distributed $7.4 million to our stockholders through our cash dividend. We also repurchased 11 thousand shares of common stock at a cost of $36 thousand under the 10b5-1 plan. During the first nine months of 2012, we distributed $22.0 million to our stockholders through the cash dividend. We also repurchased 19 thousand shares of common stock at a cost of $67 thousand under the 10b5-1 plan.

We provide no assurance as to a future declaration or payment of a cash dividend nor do we provide future assurance of a repurchase of common stock.

We believe that our investments are highly liquid instruments. We may rebalance the portfolio from time to time, which may affect the duration, credit structure, liquidity and future income of investments.

Based on historical performance and current forecasts, we believe the company's cash, cash equivalents and marketable securities will satisfy working capital needs, capital expenditures and other liquidity requirements related to existing operations for the next 12 months. Future available sources of working capital, including cash, cash equivalents, and marketable securities, cash generated from future operations, short-term or long-term financing, equity offerings or any combination of these sources, should allow us to meet our long-term liquidity needs. Current policy is to use cash, cash equivalents and marketable securities to fund business operations, to expand business, potentially through acquisitions, to repurchase common stock and to pay a cash dividend.

Goodwill

At September 28, 2012, goodwill totals $122.0 million, and is all in the Services segment. We review goodwill annually for impairment, unless potential interim indicators exist that could result in an impairment. Given that Tellabs' overall market capitalization was below its consolidated book value, we completed an interim goodwill impairment review for the Services segment. Step one of this review involved determining the Services segment's fair value using the present value of future cash flows based on management estimates, judgments and assumptions. Based on the results of our step one review, the fair value of the Services segment exceeded its carrying value; therefore, the second step of the impairment test was not required to be performed and no goodwill impairment was recognized.

GAAP Sequential Comparisons

We believe that comparing some quarterly Statement of Operations data on a sequential basis provides important supplemental information to management and investors regarding financial and business trends relating to our financial results. Commonly compared sequential comparisons of GAAP data include total revenue, geographic revenue split, and segment revenue and profit.

Third quarter 2012 compared with second quarter 2012

Total revenue, was $264.4 million, compared with $288.1 million as increased Access segment revenue was offset by declines in the other operating segments. Revenue from customers outside North America was $138.1 million, (or 52% of total revenue), compared with $150.2 million (or 52% of total revenue) as increased revenue in the APAC region was more than offset by lower revenue in the EMEA and LAC regions. Revenue from customers in North America was $126.3 million (or 48% of total revenue), compared with $137.9 million (or 48% of total revenue).


Table of Contents

Optical

Revenue from the Optical segment was $108.0 million, compared with $122.4 million. Within this segment, we saw lower revenue from the Tellabs 6300 managed transport systems, the Tellabs 5000 digital cross-connect systems and the Tellabs 7100 optical transport systems. Optical segment profit was $23.5 million, compared with $29.0 million. The decline in segment profit was driven primarily by the lower level of segment revenue.

Data

Revenue from the Data segment was $66.2 million, compared with $77.7 million. Increased revenue from the Tellabs 8800 smart routers edge systems was offset by lower revenue from the Tellabs 8600 smart routers and the Tellabs 8100 managed access systems. Data segment profit, driven by the lower revenue level, was $1.4 million compared with $5.4 million.

Access

Revenue from the Access segment was $42.3 million, up 13.4% from $37.3 million. Within this segment, increased revenue from the Tellabs 1600 single-family ONTs and the Tellabs 1000 access systems more than offset lower revenue from the Tellabs 1100 access systems. Access segment profit, driven primarily by the higher revenue level, was $11.1 million, up 85.0% from $6.0 million.

Services

Revenue from the Services segment was $47.9 million, compared with $50.7 million. The decrease in segment revenue was driven primarily by lower revenue from professional services and support agreements. Services segment profit, driven primarily by the lower level of revenue, was $15.6 million, compared with $17.2 million.

Non-GAAP Financial Measures and Comparisons

We believe that comparing some quarterly non-GAAP financial measures on a sequential basis provides important supplemental information to management and investors regarding financial and business trends relating to our financial results. Commonly compared non-GAAP financial data includes gross profit as a percentage of revenue, operating expenses, operating earnings, net earnings and net earnings per share. A complete reconciliation between non-GAAP financial measures and the GAAP financial measures, along with an explanation of why we believe non-GAAP measures to be of value to management and investors, is contained in the Reconciliation of Non-GAAP Adjustments on pages 29 through 31.

Third quarter 2012 compared with second quarter 2012

Non-GAAP gross profit margin was 39.4%, compared with 39.9%. The decline was driven primarily by lower revenue in the Data and Optical segments.

Non-GAAP operating expenses were $96.6 million, down from $106.4 million, on lower research and development, sales and marketing, and general and administrative expenses related to stopping new development of mobile packet-core products.

Non-GAAP operating earnings were $7.7 million, compared with $8.5 million, as lower operating expenses were primarily offset by the lower level of revenue.

Driven primarily by lower operating expenses and partially offset by lower revenue, non-GAAP net earnings were $6.5 million or $0.02 per share (basic and diluted), compared with $6.2 million or $0.02 per share (basic and diluted).


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                                 TELLABS, INC.

                   RECONCILIATION OF NON-GAAP ADJUSTMENTS (1)

                                  (Unaudited)



                                                       Quarter Ended             Nine Months Ended
In millions, except per-share data                 9/28/12       9/30/11       9/28/12       9/30/11

Gross Profit Reconciliation (GAAP / non-GAAP)
GAAP gross profit                                  $  103.6      $  136.3      $  313.5      $  373.8


Equity-based compensation - products (a)                0.3           0.3           0.9           1.3
Equity-based compensation - services (a)                0.4           0.5           1.3           1.7

Total adjustments related to gross profit               0.7           0.8           2.2           3.0


Non-GAAP gross profit                              $  104.3      $  137.1      $  315.7      $  376.8


Non-GAAP gross profit percentage                      39.4%         41.6%         39.0%         38.9%

Non-GAAP gross profit percentage - products           41.0%         41.9%         40.3%         40.1%
Non-GAAP gross profit percentage - services           32.6%         39.9%         32.7%         33.1%

Operating Expenses Reconciliation (GAAP /
non-GAAP)
GAAP operating expenses                            $  105.7      $  268.0      $  450.9      $  573.3


Equity-based compensation - research and
development (a)                                         1.0           2.3           4.3           8.1
Equity-based compensation - sales and marketing
(a)                                                     0.6           1.1           2.3           3.7
Equity-based compensation - general and
administrative (a)                                      3.1           2.1           7.1           7.3
Intangible asset amortization (b)                       1.1           5.0           4.3          15.3
Restructuring and other charges (c), (d)                3.3          19.5         110.2          20.5
Goodwill and IPR&D impairment (e)                        -          102.7            -          102.7

Total adjustments related to operating expenses         9.1         132.7         128.2         157.6

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