Fellow Stockholders:
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November 11, 1999
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Tellabs' performance during the third quarter, which ended on October 1, was very much a
reprise of results in recent quarters. The company has reported sales and earnings above those
of comparable quarters in the prior year every quarter for more than eight years now, and in
several of our recent quarters, we have set records for the company in both categories. This
third quarter was no exception, and true to recent form, both sales and earnings set records
for the company. For most of these eight years, revenue and earnings were driven primarily by
demand for the TITAN® 5500 digital cross-connect system, supported by revenue from the
MartisDXX™ multiplexer and echo cancellers. Again, this quarter was no exception. The
details are a little complicated, however, and a brief explanation is in order.
In the third quarter of 1998, Tellabs acquired Coherent Systems Corporation in an all-stock
transaction that was treated originally as an immaterial pooling of interests. In the third
quarter of 1999, Tellabs acquired NetCore Systems, Inc., again in an all-stock transaction,
again accounted for as a pooling of interests. Taking into account recent SEC views on the
appropriate thresholds and aggregation criteria for determining whether a merger qualifies for
immaterial pooling of interests accounting treatment, we have voluntarily restated our
financial results to reflect the inclusion of Coherent and NetCore operations as well as the
dilutive effect of all additional shares issued in these transactions. The effect of this
restatement, as well as those extraneous events which seems to have become a permanent
addition to our financial reporting, is reflected in the numbers and percentages that follow.
(More detailed restatements have been filed with the SEC.)
Sales for the quarter amounted to $594.5 million, our highest quarterly sales ever. This
represents an increase of almost 39 percent over sales of $428.4 million in the third quarter
last year. For the first nine months of this year, sales have been $1.6 billion, compared to
sales last year through three quarters of $1.2 billion. Clearly, we are closing in on the
"$2billion by 2000" objective we set for ourselves in 1995 a year early. This isn't
the complicated part.
The complications come with the earnings picture. For this third quarter, net income was a
record $144 million, compared to net income in the third quarter last year of $83.1 million.
This is a very enviable 73 percent increase. However, this quarter's earnings were increased
by about $6.9 million before taxes as a result of sale of stock held by the company as an
investment, and decreased by a charge associated with the acquisition of NetCore Systems
during the quarter. In the third quarter last year, we incurred a substantial charge
(about $13 million, pre-tax) taken in connection with the merger of Coherent Communications
and the terminated merger with CIENA Corporation. Excluding the effects of all these items,
earnings for the third quarter just ended increased 52.9 percent over those for last year's
third quarter, still a rather enviable performance. Earnings per diluted share for this year
were 35 cents and 21 cents in 1998. (For the real purists, the EPS numbers were 34 cents this
year and 23 last when all the charges and one-time gains are eliminated.)
Nine-month comparisons are even more complicated. Net income for the first three quarters of
1999 amount to $370.5 million, including all gains and charges, and for the same periods last
year, net income was $275.1 million. The figure for 1998 includes the charges noted above, and
an additional pre-tax gain of $73.4 million from the sale of stock held as an investment and a
pre-tax write-off of $24.8 million related to impaired assets. Without delving further into
such things, suffice to say that earnings this year through three quarters were up nearly 35
percent over those for last year, and if one eliminates all such one-time items, net income is
up a little over 46 percent, year over year.
As noted earlier, revenue continues to be driven largely by sales of the TITAN family of
digital cross-connect products, most notable the TITAN 5500 system. Revenue from these
products increased 43 percent, quarter to quarter, indicating both strong demand for bandwidth
and growth of infrastructure facilities, particularly in North America. This growth is driven
largely by continued demand for Internet services and by the expanding use of wireless
telephony in nearly all areas of the country. Growth for us was not quite so robust in other
parts of the world, as MartisDXX system sales were below our expectations, though modestly
above those in the third quarter of 1998, and there was, in addition, an adverse currency
effect this year. Echo canceller sales were up 26 percent, about as we'd expected, year over
year. And for the first time, really, revenue from our CABLESPAN system, which derives
telephony services over cable TV facilities, was appreciable and well above that of any prior
quarter. (This product may well represent a significant growth opportunity for us as we enter
the next millennium, after a rather prolonged gestation period.)
During this past quarter, Tellabs added two companies to the family. The first was a division
of Alcatel located in Copenhagen, Denmark, with a manufacturing presence in Ireland, and the
second a smaller private company NetCore Systems, located in Wilmington, Mass. The Alcatel
acquisition, previously known as DSC Europe, brings us SDH technology, which is the
European-standards analogous to SONET, the North American optical networking standard, and
optical design resources as well. These are important in several respects, but primarily
because they immediately augment our MartisDXX system capabilities and give us access to the
larger European-standards-based telecom networks around the world. Now known as Tellabs
Denmark, this new member of the team augments our international product portfolio. It also
increases our presence in Ireland, because most of DSC Europe's manufacturing resources were
located in Drogheda, just north of Dublin.
The acquisition of NetCore brings much-needed data-networking technology to Tellabs. The folks
at NetCore (now known as our Internetworking Systems Division) have been developing a unique
product that provides both switching and routing in a data environment. That is attractive in
its own right, but it will, in addition, provide to many of our other products access to very
formidable data-networking technology. This will considerably enhance their usefulness in this
changing and expanding telecommunications infrastructure.
In addition to products and technology, acquisitions bring added human resources to Tellabs.
Peter Viereck, former chief operating officer of DSC Europe, now managing director of Tellabs
Denmark, and Ashrof Dahod, former president and CEO of NetCore, now general manager of our
Internetworking Systems Division, are two good examples, as is Jane Brandt of NetCore who
became our vice president, Multiservice Networking Products. Another addition, Don Jones, our
new vice president of sales North America Sales, joined the family during the summer. Don
comes to us from Sears, and before that, American Express and IBM. All these folks bring to
Tellabs a considerable amount of experience and talent and are significant additions to our
management team. We welcome them most warmly.
As you can infer from all of this, Tellabs continues to grow and to develop its plans for the
future. These plans include an impressive array of new products, some of which you have heard
a little about previously - and some of which we had planned to have in the marketplace by
now. There have been some delays and "feature expansion" along the way, but all of those new
things are now very close to reality. We'll keep you informed as they materialize, and relate
them to the new products emerging from the two acquisitions as well. Tellabs is nearing its
25
th birthday, and it seems appropriate that we celebrate that event with the
emergence of an impressive new array of new products, systems and services. The year 2000
should be an exciting one, and for far more substantial reasons than "Y2K!"
Sincerely,
/s Michael J. Birck
Michael J. Birck
President and
Chief Executive Officer
Third Quarter Earnings Release
Results of Operations
Condensed Consolidated Balance Sheet
Restated Selected Quarterly Financial Data
Common Stock Market Data
Tellabs' common stock is listed on The Nasdaq Stock Market under the symbol TLAB and appears
in most daily newspaper stock tables as Telabs. At February 15, 1999, there were approximately
4,371 stockholders of record. Tellabs is a component of the Nasdaq-100 Index and the Standard
& Poor's 500 Index.
10-K Report
Stockholders may obtain without charge a copy of the Tellabs 1998 Form 10-K as filed with the
Securities and Exchange Commission upon request to:
Secretary
Tellabs, Inc.
4951 Indiana Avenue
Lisle, Illinois 60532 U.S.A.
Edgar Archives
For Tellabs investor relations contact:
Tom Scottino
+1.630.378.7504
tom.scottino@tellabs.com
Except for historical information, the matters discussed or
incorporated by reference in this document are forward-looking
statements that involve risks and uncertainties associated with
competition, market growth, customer acceptance and timely
availability of products and features, as well as other risks that may
be detailed from time to time in the company's filings with the
Securities and Exchange Commission. Tellabs' actual future results
could differ materially from those discussed here. The company
undertakes no obligation to revise or update these forward-looking
statements to reflect events or circumstances or to reflect the
occurrence of unanticipated events.
APPENDIX A
Description of Graphic and Image Material
Bar Graph of Gross Profit (In Percentages) (Restated for Coherent and NetCore Acquisitions)
Data Points: 1995-55.3%, 1996-57.7%, 1997-59.5%, 1998-58.6%, 1999-59.6%
Results for 1999 are as of 10/01/99.
Bar Graph of Book Value per Share (Restated for Coherent and NetCore Acquisitions)
Data Points: 1995-$1.21, 1996-$1.63, 1997-$2.53, 1998-$3.52, 1999-$4.53
Results for 1999 are as of 10/01/99.
Return on Equity (In Percentages)(Restated for Coherent and NetCore Acquisitions)
Data Points: 1995-32.6%, 1996-23.6%, 1997-34.0%, 1998-33.2%, 1999-32.2%
Results for 1999 are as of 10/01/99.
