Tellabs, Inc. History

Company Perspectives:

Leadership in providing innovative solutions to the communications industry worldwide. Key Dates:

Key Dates:

1975:

Michael Birck and five partners found Tellabs.

1980:

Tellabs becomes a public company.

1982:

Tellabs introduces the telecommunications industry's first viable echo canceler system.

1984:

Bell System is dissolved.

1989:

Tellabs acquires Delta Communications in Shannon, Ireland.

1990:

Tellabs acquires Martis Oy in Finland.

1991:

Tellabs introduces the TITAN 5500 digital cross-connect system.

1994:

Tellabs introduces CABLESPAN 2300 universal telephony system.

2000:

Tellabs introduces the TITAN 6700 system; company acquires SALIX Technology; Richard Notebaert replaces Michael Birck as CEO of Tellabs.

Company History:

Tellabs, Inc. is a key player in the dynamic and ultra-competitive telecommunications industry. The company designs, manufactures, markets, and services optical networking, next-generation switching, and broadband access solutions. It also provides professional services that support its products. Tellabs' customers include local and long-distance telephone companies, international service providers, wireless networks, businesses and governmental organizations with private voice and data networks, and cable television companies interested in transmitting voice, video, and data communications. These customers use Tellabs' equipment--such as the TITAN digital cross-connect systems, MartisDXX access and transport networks, and FOCUS systems&mdashø handle millions of phone calls and Internet connections. With 14 development centers and six manufacturing facilities, Tellabs is truly a global concern, operating in North America, Europe, Latin America, Asia, Africa, and the Middle East.

Early Years: 1975-84

Tellabs was founded in 1975, when six men, all with various degrees of experience in electrical engineering and sales, got together around a suburban Chicago kitchen table, 'drinking coffee and brainstorming.' (Of the six, two would stay with the company for over 20 years: Michael Birck, who was Tellabs' CEO and president until 2000, when he became chairman, and Chris Cooney, vice-president of sales.) The group planned to form a telecommunications company that did not fit traditional corporate molds, one that offered customers products and services that met their specific needs.

Between them, the six partners raised start-up capital of $110,000 and incorporated Tellabs in the spring of 1975. The company's research and development department consisted of one man, a handmade wooden workbench, a used soldering machine (purchased for $25), and an outdated oscilloscope. Its sales force consisted of two men and two used Chrysler New Yorkers, chosen for their large trunks. Within months, the company began marketing its first product, an echo suppressor intended for independent telephone companies, such as Continental Telephone and GTE.

During this time, the founding members drew no salaries. Family members supported the new company by going back to work, mortgaging homes, cleaning Tellabs' offices on weekends--even posing as assembly line workers when potential customers were taken through the 'plant.' By December 1975, Tellabs was enjoying a bit of success. It had 20 permanent employees and sales of $312,000. Soon the company landed an account with Western Union, its first major customer. By 1977, Tellabs was able to move into a permanent facility in Lisle, Illinois, and its sales force had quadrupled to eight. That year, annual sales jumped to $7.8 million.

New Challenges and Opportunities in the 1980s

Tellabs' expansion continued with the opening of its first subsidiary, Tellabs Communications Canada, Ltd., in 1979. The following year, the company expanded its market to the south, with the opening of its Tellabs Texas manufacturing facility, and also became public, trading on the NASDAQ exchange. The company put more money into R & D, developing complex networking systems, as well as a line of digital communications systems for telephone companies and large computer systems. In 1983, with the opening of Tellabs' fourth facility in Puerto Rico, it seemed Tellabs' growth would continue uninterrupted. Then, in 1984, the monolithic Bell System was dissolved, and several regional 'Baby Bell' companies emerged.

Prior to the breakup, the Bell System had designed its own products through its subsidiary Bell Laboratories and produced them through Western Electric, AT & T's manufacturing division. Suddenly, through the divestiture, the previously closed Bell market was wide open. Although analysts had predicted that companies like Tellabs would benefit substantially from the new market, the new arrangement prompted intense competition as a large number of new companies emerged to compete for contracts with the Baby Bells. Regional Bell companies no longer had the financial resources of Ma Bell to rely upon and began looking for the lowest possible bidder when making new purchases. Competition became fierce, and although Tellabs' sales hit $100 million in 1985, gross profit margin dropped from 50 percent in 1984 to 35 percent in 1985.

Company management thus decided to make some internal changes in order to compete more effectively. Tellabs implemented a progressive management system, incorporating the Japanese just-in-time inventory plan, new employee training programs, and replacing traditional manufacturing lines with manufacturing cells, with each employee skilled in a number of interchangeable functions. The company also increased its research and development expenditures by about 40 percent and began developing such products as the $100,000 CROSSNET digital interchange product, CT1 multiplexer, that brought in much higher profit margins than Tellabs' early $200 echo suppressor. As private communications networks sprang up, Tellabs began to customize products to meet their needs. The company's increased efficiency in bringing new products to the market also allowed it to effectively win a bid against Bell Labs and Western Electric for an ongoing contract to supply AT & T with networking multiplexers, an integral component in AT & T's communications operations.

By 1987, Tellabs was back on the road to profitability, with improved sales to regional Bell companies as well as to long-distance service providers. That year, the company signed a $10 million contract with the long-distance carrier Sprint to supply its entire optical fiber network with digital echo cancelers. Sales for 1987 rose 18 percent to $136.1 million; net income rose 27 percent to $10.7 million.

Also that year, Tellabs began boosting efforts to penetrate foreign markets. 'We didn't have the staff or the right products to address foreign markets before,' CEO Birck told shareholders the following year, noting that 'in 1987 we felt we were big enough and had a sufficient array of products to make a real commitment overseas.' Birck then predicted that overseas sales, which accounted for 1 percent of revenues in the early 1980s, would rise to 30 percent by 1990. By 1988, Tellabs had opened sales offices in London, Australia, and Hong Kong and had expanded its Canadian operations.

In 1989, the company made a significant step towards increasing its European presence with the acquisition of Delta Communications in Shannon, Ireland. Renamed Tellabs Ltd., the subsidiary supplied signaling and conversion systems for Europe's E1 telecommunications markets, a venue previously untapped by Tellabs. By 1992, Tellabs' foreign sales network expanded to cover Belgium, New Zealand, Korea, and Mexico, where government monopolies on telecommunications systems were beginning to dissolve. The following year the company acquired Martis Oy, a Finnish telecommunications supplier, for approximately $70 million. This acquisition further solidified Tellabs' European market presence. With Martis Oy, Tellabs also obtained a product--the DYX multiplexer--that was compatible with synchronous digital hierarchy, which is the digital standard that most of the world (excluding the United States) uses. The DYX multiplexer provided the platform for Tellabs' tremendously successful MartisDXX access and transport networks.

New Products and Soaring Sales: 1991-99

Tellabs' marketing efforts worldwide were boosted by an array of new, state-of-the art technologies. Foremost among these was the TITAN 5500 digital cross-connect system, which Tellabs introduced in 1991. Digital cross-connect systems route telephone calls and Internet transmissions between switching centers in the networks of local and long-distance carriers. Although the TITAN 5500 only generated $13 million in 1991, the equipment quickly became known as the 'Cadillac' of the industry, according to Crain's Chicago Business. By 1993, the TITAN accounted for over $80 million of Tellabs' annual revenues.

Although Tellabs focused on its digital cross-connect systems segment in the early 1990s, the company did not overlook its booming business in echo cancelers. In 1991 Tellabs introduced a line of digital echo cancelers designed to work in conjunction with new fiber optics systems. These products provided a huge boost to the company, as sales of echo cancelers alone reached $40 million in 1992 (second only to AT & T in the entire industry). Tellabs' total revenues increased 90 percent between 1992 and 1993, to hit a record high of $320 million. The company's success did not go unnoticed on Wall Street. Tellabs' stock price jumped from $21 per share to just over $69 per share during the same period.

Just as Tellabs had benefited from--and been challenged by--the breakup of the monolithic Bell system in 1984, the company stood to realize significant gains as the telecommunications industry went through a second revolution in the mid-1990s. Traffic on telephone networks grew exponentially as ever increasing numbers of individuals and businesses used the Internet. Telephone companies scrambled to keep up with this surge in demand on their once unchallenged networks. Some turned to fiber optic line, which can carry over ten times as much traffic as conventional copper wire. Others sought new ways to manage the traffic on their existing networks more efficiently.

In 1996 Congress passed the landmark Telecommunications Act, which brought additional changes to the industry. In the wake of this deregulatory legislation, long-distance telephone providers could enter the local calling market, while the seven 'Baby Bells' could join the long-distance fray. Competition in the telecommunications industry grew fierce as a result of these tectonic shifts. Local and long-distance telephone companies eyed each other's networks hungrily. At the same time, cable television companies recognized that they could do far more than bring cable television into people's homes, as they had already established a network infrastructure that was enviable in its reach.

Tellabs was ideally situated to capitalize on the industry's ongoing fluctuations. More players in the telecommunications industry meant more business for equipment manufacturers like Tellabs. For example, Tellabs teamed up with Advanced Fibre Communications, Inc., and introduced the CABLESPAN 2300 Universal Telephony Distribution System in 1994. This unique equipment allowed a wideband signal--such as those that were common in cable television&mdashø be split, thus enabling companies to offer both voice and video service with the same delivery system that once brought only cable television pictures. The CABLESPAN technology thus gave cable television companies the chance to compete in the burgeoning voice-transmission market without having to build a new system.

At the same time, Tellabs was already in a position to profit from the surge in traffic along established phone networks. The TITAN 5500 helped networks manage digital circuits more efficiently. With the aid of the cross-connect system, carriers could easily reroute circuits, thereby boosting the capacity of their fragile networks. The TITAN became even more essential to carriers as Tellabs periodically released updated hardware and software for the equipment. By 1994, the TITAN could manage 688,000 simultaneous phone calls.

Despite Tellabs' unparalleled success, CEO Birck recognized that his company's future was in no way guaranteed. 'You are not going to just grow continuously at the rate we've been growing without getting into new lines,' he told Crain's Chicago Business. In an effort to expand its reach, Tellabs spent about $76 million in 1996 to acquire Steinbrecher Corp., a manufacturer of extensive wireless technologies. With this purchase, Tellabs entered the potentially lucrative fixed wireless market. Since building traditional wired networks involves monumental commitments of time and money, Tellabs thought that creating wireless local phone systems could be a boon to developing countries. Instead of laying thousands of miles of wire, these nations could extend local telephone service through wireless local loops. Although the concept was promising, it did not bring immediate returns to Tellabs. The company's sales rose again in 1996, but its fixed wireless business never got off the ground.

Undeterred, Tellabs also continued to bolster its research and manufacturing capacity. In 1996 the company carried out a $33 million expansion of its plant in Bolingbrook, Illinois. The following year, Tellabs built a new facility in Ireland for the research and development of broadband technologies. Fueled by its growth, Tellabs' revenues topped $1 billion for the first time in 1997.

Despite these successes, some analysts remained downbeat about Tellabs' future prospects. The telecommunications industry was rapidly consolidating in the late 1990s, and the company's major customers increasingly wanted 'one-stop shopping' from their suppliers. Tellabs risked becoming a niche player--and a target for acquisition--if it could not bulk up and offer more products. In June 1998, Tellabs announced that it was purchasing Ciena Corp. for about $7.1 billion. Industry pundits applauded the move for many reasons. Not only would Tellabs become a bigger industry player after such a major acquisition, but it also would gain a foothold in the optical technology field. Ciena produced fiber optic transmission gear, which was in high demand as carriers scrambled to convert their networks from traditional copper wires to speedier optical ones. Tellabs itself did not offer optical equipment, and Ciena would help Tellabs to bridge this gap. Despite its potential upside, though, the deal collapsed after Ciena abruptly lost a significant contract with one of its major customers, and its stock price plummeted. Tellabs' shareholders balked at a merger with a company that appeared to be on shaky ground.

Tellabs did not abandon its efforts to expand, however. In August 1998 it purchased Coherent Communications, a leader in the echo canceler field. The following year, Tellabs added Internet backbone specialist Netcore Inc., as well as Salix Technologies, Inc., a producer of switching equipment, and a business unit of the Paris-based Alcatel SA. Also in 1999, the company hired 2,000 new employees and began construction on a new $75 million headquarters.

More impressive was the fact that Tellabs continued its tremendous growth streak. Between 1993 and 1999 Tellabs' revenue increased at a 36.4 percent compound annual rate--with no slowdown in sight. Analysts were surprised that the TITAN equipment kept selling, as they had 'anticipated that newer-style networks designed for Internet traffic would make Tellabs' Titan line ... obsolete,' Crain's Chicago Business explained. But the experts had not counted the fact that carriers were reluctant to abandon their existing networks because of the huge costs involved in building a new optical one. As a result, carriers used the updated TITAN 5500 to manage the transition to new networks. At the same time, Tellabs' research and development arm worked frantically to complete the TITAN 6500, a multiservice transport system that had the data-switching capabilities that were so crucial to handling Internet transmissions. Still further back in the pipeline was the TITAN 6700, an optical switch that could simultaneously carry 80 million Internet calls.

2000 and Beyond

In 2000 Tellabs was sufficiently bullish about its future to announce its 'X3 by 03' plan&mdashmed at tripling the company's annual sales to $9 billion by 2003. To shepherd the company toward this goal, Birck brought in Richard Notebaert to be Tellabs' new president and CEO in 2000. Birck became the chairman of the board of directors, where he hoped to oversee longer-term planning. Tellabs' sales rose to nearly $3.4 billion in 2000, fueled in part by the release of the TITAN 6500 in August of that year. The company introduced five other cutting-edge products in 2000, and planned to release the TITAN 6700 late in 2001.

Tellabs' future prospects looked bright. The company acquired Future Networks Inc. in March 2001, thereby entering more deeply into the data transmission sector. Future Networks made standards-based voice and cable modem technology. The telecommunications industry remained hard to predict, but Tellabs' resilience was impressive. 'Tellabs is used to working in chaos. They thrive on it,' an analyst told the Chicago Tribune.

Principal Competitors: Alcatel; Lucent Technologies Inc.; Cisco Systems, Inc,; Nortel Networks Corporation.

Further Reading:

• Cahill, Joseph, 'Prowling Tech Predators Put Tellabs on the Hunt,' Crain's Chicago Business, November 17, 1997.
• ------, 'Tellabs Comes Calling in Two New Markets,' Crain's Chicago Business, October 7, 1996.
• Murphy, H. Lee, 'Phone Company Competition Dampens Tellabs' Optimism,' Crain's Chicago Business, May 5, 1986, p. 57.
• Osterland, Andrew, 'Oh What a Lovely War,' Financial World Partners, October 10, 1995.
• ------, 'Phone Lines Dial Up Dollars for Tellabs,' Crain's Chicago Business, May 2, 1988, p. 35.
• Rose, Barbara, 'Tellabs Bets on Upturn from New Products,' Crain's Chicago Business, May 6, 1985, p. 56.
• ------, 'Tellabs, Inc.,' Crain's Chicago Business, June 7, 2000.
• Quintanilla, Carl, 'As Domestic Growth Eases, Tellabs Sees Europe As Next Site for Expansion,' Wall Street Journal, February 14, 1994, p. B6.
• Slutsker, Gary, 'Goliath, Meet Michael Birck,' Forbes, December 7, 1992, p. 156.
• Van, John, 'Tellabs' Footing Grows Stronger on Lucent's Turf,' Chicago Tribune, February 2, 2001.
• Yates, Ronald E., 'Tellabs Tough on Indifference: Company Makes Its Workers Feel Part of the Action,' Chicago Tribune, April 17, 1994, p. 1.

Source: International Directory of Company Histories, Vol. 40. St. James Press, 2001.