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Tellabs, Inc.


4951 Indiana Avenue
Lisle, Illinois 60532

Telephone: (708) 969-8800
Fax: (708) 852-7346

Public Company
Incorporated: 1975
Employees: 2,000
Sales: $320 million
Stock Exchanges: NASDAQ
SICs: 3661 Telephone & Telegraph Apparatus; 3613 Switchgear & Switchboard Apparatus; 3669 Communications Equipment, Not Elsewhere Classified

Company History:

An international company that designs, manufactures, markets, and services telecommunications equipment, Tellabs, Inc. has become an innovative force in the ever-expanding telecommunications industry. Tellabs's customers include the regional Bell companies and their subsidiaries, long-distance companies such as MCI and Sprint, international service providers, and businesses and governmental organizations with private voice and data networks. The company's sales network covers North America, Asia, and Europe, with manufacturing plants in Illinois, Texas, Ireland, and Finland, and international sales offices in Ireland, England, Belgium, Sweden, Finland, Hong Kong, Australia, New Zealand, South Korea, Beijing, Munich, and the United Arab Emirates. Sales topped $320 million in 1993, with profits of $32 million.

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, CEO and president, 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consisted of one man, a handmade wooden workbench, a used soldering machine (purchased for $25 dollars), and an outdated oscilloscope.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.

Tellabs's 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 research and development, 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's 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 break-up, 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's 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 management system, 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's 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 cancellers. 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 one 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's 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 purchased for approximately $70 million. This acquisition further solidified Tellabs's European market presence and gave the company the impetus to expand into other international markets.

Tellabs's marketing efforts worldwide were boosted by an array of new, state-of-the art technologies, such as the TITAN 5500 digital cross-connect system introduced in 1991 and a line of digital echo cancellers designed to work in conjunction with new fiber optics systems. By 1992, Tellabs's sales of digital echo cancellers totaled $40 million, second only to AT&T. Also in 1992, Tellabs entered the race to market high-bit-rate digital subscriber line (HDSL) equipment, a much anticipated technology which converted ordinary copper telephone lines into high-capacity digital lines. Fueled by an expanded TITAN line, Tellabs's total sales soared in 1993, up 90 percent over the previous year to a record high of $320 million with earnings of $32 million. Tellabs was a darling on Wall Street, as stock prices jumped from $21 per share to just over $69 per share.

On the eve of its 20th anniversary, Tellabs's growth seemed to have paralleled that of the booming North American telecommunications industry. Sensing that sales in North America had begun to plateau, Tellabs branched out to new growth markets worldwide with the hope of competing with European giant Ericsson, AB. Moreover, as the telecommunications industry found new applications for its technology in fields such as cable television, Tellabs seemed well poised to benefit; in 1994, Tellabs introduced a new asynchronous transfer mode product, Alta 2600, and the CABLESPAN 2300 Universal Telephony Distribution System. Ultimately, the company's future in all markets depended on its ability to deliver the right technology at the right time, and Tellabs was proving itself capable: first-half sales in 1994 topped $200 million, and continued growth seemed likely. In fact, sales of $345 million for the first nine months exceeded the total for the year 1993. Tellabs was headed toward its ninth successive year of improvement in gross margins and second consecutive year over 50 percent.

Principal Subsidiaries: Tellabs Operations, Inc.; Tellabs Communications Canada Ltd.; Tellabs Ltd.; Martis Oy.

Further Reading:

Murphy, H. Lee, "Phone Company Competition Dampens Tellabs' Optimism," Crain's Chicago Business, May 5, 1986, p. 57; "Phone Lines Dial Up Dollars for Tellabs," Crain's Chicago Business, May 2, 1988, p. 35; "Tellabs Bets on Upturn from New Products," Crain's Chicago Business, May 6, 1985, p. 56.
Quintanilla, Carl, "As Domestic Growth Eases, Tellabs Sees Europe as Next Site for Expansion," The Wall Street Journal, February 14, 1994, p. B6.
Slutsker, Gary, "Goliath, Meet Michael Birck," Forbes, December 7, 1992, p. 156.
Yates, Ronald E., "Tellabs Tough on Indifference: Company Makes Its Workers Feel Part of the Action," Chicago Tribune, April 17, 1994, Sec. 7, p. 1.

Source: International Directory of Company Histories, Vol. 11. St. James Press, 1995.

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