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Tellabs Upgraded to Neutral

Zacks Equity Research

Tellabs Inc’s (NasdaqGS:TLAB - News) woes continue as the company reported weak financial result for the third quarter of 2011 and provided a tepid outlook for the ensuing fourth quarter. Although international revenue increased, lower revenue from North America is the primary reason for this poor performance.

The company’s three reporting segments witnessed reduction in sales. Tellabs’ globally reputed high-margin digital cross-connect products are still showing a downtrend, while significantly affecting its bottom line.

Furthermore, the company is facing serious problems as its key customer AT&T Inc. (NYSE:T - News) is moving away. Tellabs is aggressively targeting the mobile Internet market since its legacy switching products are gradually losing relevance. Meanwhile, the stock price plummeted nearly 43% in the last year, which may provide cushion for further downslide. We, therefore, upgrade our recommendation to Neutral.

Tellabs has given a dismal financial outlook for the fourth quarter of 2011. This dismal condition resulted from the continuous decline in sales of Tellabs’ legacy products and its newly launched growth products, which intensified the competition further.

The company has planned to expand globally. Although international revenue is grossly offsetting the loss of revenue in North America, Tellabs is facing margin pressure. The company is forced to sell its growth products at lower margin in these regions in order to capture market share.

Nevertheless, we believe the acquisition of  WiChorus will be incrementally positive for Tellabs’ growth in the long term. WiChorus’ state-of-the-art SmartCore 9200 platform is a leading mobile packet core solution that has been developed for next-generation (4G) LTE technology together with support for 3G networks. Integration of SmartCore with Tellabs’ existing IP mobile backhaul solution and intelligent network manager will create a formidable player in the industry.

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