We reiterate our long-term Neutral recommendation on Tellabs Inc. (TLAB). The company reported disappointing financial results for the first quarter of 2013. Both the top line and the bottom line fell below the Zacks Consensus Estimate. Meanwhile, the stock price of Tellabs declined 46% in the last year and is currently trading at the low-end of its 52-week price range. We believe that this low-level of valuation may act as a cushion for further downslide of the stock price.
Why the Reiteration?
Tellabs is facing serious problems in its core wireless backhaul solutions segment. AT&T Inc. (T) was the major customer for its 8800 multi-service router. However, AT&T decided to upgrade its network with pure Ethernet solutions since the company is aggressively deploying 4G LTE networks. As a result, AT&T is not using Ethernet routers of Tellabs now. AT&T historically generated 35% of the company’s total sales and 40% of the Data product revenues. In the first quarter of 2013, Data product revenues of Tellabs were down 52.6% year over year.
Moreover, Tellabs’ worldwide reputed high-margin digital cross-connect products continued to show a downtrend. The board of directors has decided to stop dividend payment in the first quarter of 2013. Management provided a weak financial guidance for the ensuing second quarter.
Nevertheless, management has taken several strategic decisions to restructure Tellabs’ business model emphasizing on the mobile Internet sector, including mobile backhaul solution, IP-packet optical solution and Tellabs’ Insight Analytics Services.Tellabs is aggressively targeting the booming mobile Internet markets since its legacy switching products are losing relevance.
Other Stocks to Consider
Tellabs currently has a Zacks Rank #4 (Sell). However, other stocks in the same industry that are worth considering include ShoreTel Inc. (SHOR) and Ubiquiti Networks Inc. (UBNT). Both these stocks currently carry a Zacks Rank #1 (Strong Buy).
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