Tellabs Underperforms, Outlook Weak - Analyst Blog

Tellabs Inc. (TLAB) declared fourth quarter of 2010 financial results today that fell below the Zacks Consensus Estimates. Total revenue of $410.5 million was up 5.4% year over year but below the Zacks Consensus Estimate of $418 million. Higher revenue in the Broadband segment was partially offset by lower revenue in both Transport and Services segments.

On a GAAP basis, net loss in the fourth quarter of 2010 was $10.9 million or a loss of 3 cents per share compared with a net income of $62.1 million or an income of 16 cents per share in the prior year quarter. Adjusted (excluding special items) EPS in the reported quarter was break-even, significantly below the Zacks Consensus Estimate of 8 cents.

GAAP gross margin was 38% compared with 45.3% in the year ago quarter. Massive decline in gross margin was mainly attributable to a $16.5 million charge for excess purchase commitments related to a cancelled tender in India.

Operating expenses in the quarter, were $162.5 million compared with $141.1 million in the prior-year quarter. The increase in operating expenses was mainly due to higher research and development costs. Fourth quarter of 2010 operating margin was a negative 1.6% compared with 9% in the year ago quarter.

During the reported quarter, the company repurchased 7.6 million shares for a consideration of $50.9 million. Tellabs plans to continue returning capital to stockholders through dividends and share repurchases. During the fourth quarter, Tellabs also distributed more than $7.3 million to stockholders through quarterly cash dividend.

During fiscal 2010, Tellabs generated $288.8 million of cash from operation compared with $229.7 million in the previous year. Free cash flow in fiscal 2010 was $233.2 million compared with $183.8 million in fiscal 2009.

At the end of fiscal 2010, Tellabs had $1,134.5 million of cash & marketable securities on its balance sheet compared with $1,104.8 million at the end of fiscal 2009. Balance sheet of Tellabs had no outstanding debt.

Broadband Segment

Total revenue of the Broadband segment was $227 million, up 18.6% year over year. Within this segment, Data Product revenue was $119.9 million, up 32.5% over the year ago quarter. Access revenue was $69.6 million, up 25% over the prior year quarter. Managed Access revenue was $37.5 million, down 17% year over year.

Broadband segment profit was $33.8 million, down 23.9% year over year. The huge decline in segment profit was driven by a $16.5 million charge for excess purchase commitments, lower managed access and access product revenue and higher research and development spending for data products.

Transport Segment

Total revenue of the Transport segment was $123.3 million, down 7.4% year over year.  This was primarily due to lower revenue from digital cross-connect systems partially offset by higher optical systems revenue.  This segment generated a profit of $23.5 million, down 47.2% year over year. This sharp decline in segment profit was the result of devastatingly weak sales of high-margin digital cross-connect systems.

Services Segment

Total revenue of the Services segment was $60.2 million, down 7% year over year.  Decline in revenue was the combined effect of lower deployment of Tellabs systems resulting in lower professional services and training revenue. This segment generated a profit of $18.5 million, down 18.1% year over year. This was mainly driven by the higher cost of production.

Geographic Distribution

In the fourth quarter of 2010, North America region generated $240.5 million of revenue compared with $255.4 million in the year ago quarter. Rest of the World generated the remaining $170 million compared with $133.9 million in the prior year quarter.

Portfolio Distribution

In the fourth quarter of 2010, Growth products generated $231.4 million of revenue, up 22.8% from $188.5 million in the year ago quarter. Growth products now constitute 56.3% of total revenue. Core products generated the remaining $179.1 million compared with $200.8 million in the year ago quarter.

Future Financial Outlook by Management

Management expects its first quarter of fiscal 2011 revenue to be in the range of $315 million to $335 million. Its mid-point of $325 million is miles below the current Zacks Consensus Estimate of $403 million.

Non-GAAP gross margin is expected to be 40%, plus or minus 1 or 2 percentage points, depending on product mix. Non-GAAP operating expenses are expected to be in the mid-to-high $140 million range. Stock-based compensation expenses will be approximately $6 million. Non-GAAP tax rate is expected to be about 32%.

Recommendation

Our major concern for Tellabs is the increasing competition in its core wireless backhaul solutions segment. We believe Tellabs will not be able to maintain its current business rate with its most important customer AT&T (T). Historically AT&T generated 20%-21% of Tellabs' total revenue and accounted for nearly 40% of the company's sales of the broadband-data networking products.

We maintain our long-term Neutral recommendation for Tellabs. Currently it is a short-term Zacks #3 Rank (Hold) stock.

 
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