Spending from AT&T and its constituent companies improved in the second quarter but haven’t yet returned to the levels seen before last year’s merger with BellSouth, according to Tellabs. The equipment vendor’s revenue was up 18% sequentially to $535 million in the second quarter but down 3% from a year earlier.

Notably, Tellabs today reported a sequential increase in sales of fiber-to-the-curb (FTTC) gear to AT&T’s former BellSouth territory, where the vendor has a large installed base. Sales of FTTC gear to BellSouth dipped in the first quarter as the carrier came under the new ownership of AT&T, which favors fiber-to-the-node (FTTN), spurring uncertainty about the future technological direction of that network. In recent months, analysts have conjectured that AT&T is likely to eventually bring its FTTN architecture into the BellSouth footprint.

During today’s earnings conference call, Tellabs Chief Executive Officer Krish Prabhu declined to elaborate much on the sequential increase in FTTC revenue from BellSouth, pointing out that a seasonal sales increase in the second quarter is typical. But he did say that third-quarter FTTC sales would depend on “new home construction in the Southeast and the kind of spending freeze or curves [AT&T] may or may not have post-merger.”

“We’re encouraged that the business improved in the second quarter,” he said. “We’ll wait and see what happens in the third quarter.”

Oblique reference was made at one point during the call to recent rumors that Tellabs is entertaining an acquisition offer from Nokia Siemens Networks. One analyst asked why, despite promises to act, the company’s board had not yet made a decision about how to return some of its considerable stores of cash to shareholders (especially since the company ruled out being on the buying side of any major acquisitions anytime soon). Hypothetically, the analyst added, would such a decision be prohibited if Tellabs were in strategic discussions with a potential buyer?

In response, Prabhu hesitated, confessing he was unqualified to answer. But Chief Financial Officer Tim Wiggins chimed in, “You could make a construct that that would be a problem if you were [in strategic discussions].”

Prabhu also predicted healthy sales of broadband passive optical networking (BPON) gear to Verizon Communications next year, despite the fact that the carrier began deploying a faster technology, gigabit PON (GPON), this spring.

“We think [Verizon] will do both BPON and GPON for a while,” Prabhu said. “We said last year that 2007 would be predominantly BPON, and it’s playing out that way. We think there will be a strong BPON business in 2008.”

In April, Infonetics Research predicted global spending on BPON gear would drop 33% this year to $197 million and fall to just $30 million by 2009.

Tellabs also promised to aggressively pursue sales of broadband access gear to independent operating carriers. Competing vendors such as Adtran, Calix and Occam Networks have targeted this market in recent years, taking advantage of Tellabs’ distracting focus on Verizon by replacing the aging installed equipment of Advanced Fibre Communications, which Tellabs acquired in 2004. One analyst on today’s call suggested that Tellabs may face an uphill battle competing in that market now, in part because some rural telcos now bear “ill will” toward Tellabs for ignoring them.

Prabhu maintained that Tellabs’ access gear, namely its 1134 and 1150 products, offer more bandwidth to the home than competing solutions and a path to deploy IPTV. As for the “ill will” from independents, Prabhu said, “I wouldn’t characterize it as ill will. They have a business problem, and we have a solution. Rather than talk too much about it right now, lets let the scoreboard do the talking. We’ll just watch the scoreboard over the next four quarters.”

Tellabs expects about $500 million in third-quarter revenue, an outlook UBS Investment Research called “weak” compared with UBS’s projection of $523 million.