Analysts See Trouble at Tellabs

Analysts are concerned about sales of new fixed-line products and potential acquisitions

April 13, 2004

2 Min Read
Analysts See Trouble at Tellabs

Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) is struggling to develop strong new lines of business and may be tempted into troublesome acquisitions to boost its prospects, industry analysts warn.

The equipment company is due to report its first-quarter figures on April 21, with revenues expected to fall from the previous quarter's $279 million (see Tellabs Q4 Revenue Up 14%). Smith Barney Equity Research analyst Alex Henderson expects revenues of $251.1 million, while Ehud Gelblum at JPMorgan Securities predicts revenues of $262.5 million.

Gelblum has raised his estimate from $250.5 million due to a backlog of bookings and some "recent positive datapoints."

That sounds encouraging, but the problem for Tellabs is that these "positive datapoints" do not relate to the sales of new, next-generation equipment that may have long-term growth potential. "While carriers' needs to enhance wireless coverage has spurred spending on legacy equipment, we still believe [Tellabs] is not positioned to capture next-gen circuit-to-packet spending as new product sales have thus far fallen short," writes the JPMorgan analyst in a Monday research note.

That view was echoed by Henderson this morning. He predicts revenues from new optical products will rise quarter-on-quarter -- up 35 percent in the U.S. to $7.5 million, and up 10 percent internationally to $17.6 million. But Henderson and company don't see "the company's new optical and data products ramping significantly fast enough to drive the type of top and bottom line growth that would make Tellabs an attractive investment relative to the data networking companies, which we generally target in the 15 percent to 20 percent long term growth range."

Instead, Henderson puts Tellabs' long-term growth at about 5 percent.

Both analysts made comments reflecting concern that Tellabs, under new CEO Krish Prabhu, could weaken its position by resorting to acquisitions that could exhaust or distract the company. Gelblum, in particular, notes Tellabs will "seek growth through acquisition and [is] concerned this could lead to execution risk."

Thing is, Tellabs knows it needs to revamp. When appointed in February, Prabhu said "the industry is undergoing a transition in front of our eyes, and we will need to change."

The new CEO then addressed the possibility of acquisitions, saying that if Tellabs needs to "broaden its playground, we'll make the right move at the right time." (See Tellabs Names Prabhu as New CEO.)

Tellabs has been linked with a number of possible acquisition targets, including access gear specialists Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI) and Catena Networks Inc. (see Talk of AFC Deal Is Back and M&A's New Currency).

The vendor's share price is down $0.13 (1.40%) to $9.17, valuing the company at about $3.81 billion.

— Ray Le Maistre, International Editor, Boardwatch

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