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Earnings Preview: Tellabs Inc.

Zacks Equity Research

Earnings Preview: Tellabs Inc.

Tellabs Inc. (TLAB) is slated to release its third-quarter 2012 results on Wednesday, October 24, after the closing bell. The current Zacks Consensus Estimate for the third quarter stands at break even, representing a growth of 66.67% from the year-ago quarter.

With respect to earnings surprise, Tellabs has outperformed the Zacks Consensus Estimate in three out of the last four quarters with an average beat of 66.67%.

Second-Quarter Performance

On July 26, 2012, TLAB declared its financial results for the second quarter of fiscal 2012 beating the Zacks Consensus Estimates. Quarterly GAAP net loss was approximately $5.0 million or 1 cent per share compared with a net loss of $29.0 million or 8 cents per share in the year-ago quarter. Second-quarter 2012 earnings per share came at break even, which was better than the Zacks Consensus Estimate by a penny.

Net revenue in the reported quarter was $288.1 million, down 9% year over year and exactly in line with the Zacks Consensus Estimate. All the four reporting segments of Tellabs witnessed declines in year-over-year sales.

Gross margin in the reported quarter was 39.6% compared with 36.4% in the year-ago quarter. Operating expenses, in the second quarter, were $112.6 million compared with $150.4 million in the prior-year quarter.

Agreement of Estimate Revisions

In the last 30 days, out of 6 estimates there were no estimate revisions in either direction for the third and fourth quarter of 2012. Likewise, out of 6 estimates there were no revisions in either direction for 2012 and 2013 over the same time frame.

Magnitude of Estimate Revisions

Over the last 30 days, the Zacks Consensus Estimates have remained unchanged for the third and fourth quarter of 2012. Similarly, the estimates haven’t moved in either direction for 2012 and 2013.

Our Take

Tellabs is aggressively targeting the booming mobile Internet markets since its legacy switching products are losing relevance. We believe, management’s strategic decision to thoroughly restructure its business model by emphasizing on mobile backhaul solution, IP-packet optical solution coupled with its massive headcount reduction and consolidation of research and development facilities will lead to further improvement in margins going forward. However, our major concern for Tellabs is the increasing competition in its core wireless backhaul solutions segment. The company has already lost a significant amount of business from its most important customer AT&T Inc. (T), which could have severe consequences on Tellabs’ financial condition in 2012.

We are maintaining our long-term Neutral recommendation on Tellabs. The company also holds a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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