Tellabs reported stronger than expected sales in the second quarter, reporting $549 million in revenue, a 19% increase from a year earlier. While the vendor reported a slight drop in visibility for the next quarter, it also addressed some of its long-term prospects and future potential.

Revenue from access gear surpassed that from transport gear by a ratio of three to two in the second quarter. But despite expectations that the vendor’s transport business will soon start to fade, Tellabs cited a recent internal study concluding that its legacy crossconnect could continue to be a strong seller through 2009.

The company offered broader than normal expectations for the third quarter--predicting revenue growth 10% to 15% higher than last year--claiming two factors were clouding visibility: Some major customers are “selectively managing their inventories,” Tellabs’ Chief Executive Officer Krish Prabhu said, and there is some uncertainty over whether BellSouth will rein in spending as it approaches its pending acquisition by AT&T.

In its own second-quarter earnings call this month, BellSouth said its spending would drop later this year following the completion of hurricane repairs but that it would continue investing in broadband. In a research note following that call, Morgan Keegan analyst Simon Leopold said that statement, along with higher-than-expected spending in BellSouth’s second quarter, “provides encouragement that…Tellabs’ business with BellSouth has not fallen off a cliff.”

Tellabs supplies the access gear for BellSouth’s fiber-to-the-premises (FTTP) and fiber-to-the-curb (FTTC) networks, whereas its presumptive new parent, AT&T, favors FTTP and fiber-to-the-node gear from Alcatel. Following the merger, Prabhu is confident Tellabs’ role as BellSouth’s fiber access supplier isn’t in jeopardy anytime in the next several years.

“I’m not too worried about the BellSouth part of the business,” he said. “I talked to everybody at AT&T and BellSouth that I know and that would give me a meeting. I have no reason to believe [BellSouth’s FTTC deployment] would be stopped overnight.”

Furthermore, Prabhu hopes to convince AT&T to deploy Tellabs’ gear in the network beyond BellSouth territory. “We become a critical supplier to AT&T through this merger,” he said.

Prabhu also voiced confidence in Tellabs’ chances of being selected by Verizon Communications to deploy gigabit passive optical networking (GPON) gear. As Tellabs has at times lagged behind Verizon’s GPON timetable, one analyst on this morning’s call asked if the vendor could miss out on early deployment revenue there. But Prabhu said Tellabs’ history as Verizon’s incumbent PON supplier gives it other time advantages. For example, after lab testing of the equipment, Tellabs (unlike other vendors) won’t need to spend time being integrated with Verizon’s operations support systems because Tellabs has already gone through that process.

“I don’t look at the fact that we’re a few months late into the lab as slowing us down, because we do have the lead in certain areas as an incumbent supplier,” he said. “We’re planning we will have a shot in early deployment as good as the next guy.”

When asked about one of Tellabs’ optical network terminals (ONTs, the customer premises equipment in FTTP networks), Prabhu admitted that it may not deliver the improved margins it once promised. The 612, scheduled to start shipping in the fourth quarter, was meant to bring two benefits: thicker margins than previous ONTs and a specific functionality desired by Verizon. (Namely, the 612 supports MoCA technology from the Multimedia over Coax Alliance, which allows carriers to make use of the existing coaxial cable in many homes, saving installation costs.) But as the fiber access business grows increasingly price-competitive, it’s no longer clear what the 612’s margins will be.

“We’ll have to look at the margins more carefully,” Prabhu said. “We’re negotiating slightly different pricing with the customer.”