Carrier Cutbacks Hit Tellabs

The prolonged merger process between AT&T Inc. (NYSE: T) and BellSouth Corp. (NYSE: BLS) caused some unexpected post-holiday pain at Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), which snuck out an earnings warning late Friday evening.

The vendor said its fourth-quarter revenues and earnings are set to be far lower than previous estimates, with lower-than-expected spending from North American carriers one of the main factors for the shortfall. (See Tellabs Estimates Q4.)

Tellabs says its revenues in the final quarter of 2006 are expected to be between $455 and $470 million, while non-GAAP earnings will be between 10 and 12 cents.

That's much lower than the guidance offered late last October, during the vendor's third-quarter conference call, of between $525 and $550 million.

Analysts, on average, had been expecting fourth-quarter revenues of $534 million and non-GAAP earnings of 14 cents.

The news hit Tellabs' share price this morning, as it fell by $0.55 (5.13%) to $10.17 by 11:00 a.m. ET.

In its statement, Tellabs said the new, lower estimates are the result of "lower than expected revenue from some large North American customers, an unfavorable shift in product mix, revenue deferrals related to a new product launch, and a lower effective tax rate."

Analysts agree that the capex freeze at major customer BellSouth during its prolonged merger process with AT&T is one of the main causes. That process has been hitting a number of vendors in the past few quarters, though the strain should start to ease now that the merger has been approved. (See Cisco to FCC: Hurry Up!)

But BellSouth isn't the only carrier that's been tightening its purse strings. Michael Genovese at Citigroup cites Verizon Communications Inc. (NYSE: VZ) and Cingular Wireless as other sources of lower capital outlay. (See Tellabs Sneaks in a Cingular Win, FCC Welcomes 'Ma Bell' Back, AT&T, BellSouth Merge, and Alcatel Joins Verizon PON Party.)

Genovese believes spending at "all of these accounts should improve significantly" during the first six months of this year, but things could get tougher for Tellabs after that, as competition intensifies and prices drop.

Prudential Equity Group LLC analyst Inder Singh pinpoints the vendor's recent crossconnect and GPON launches as the likely cause of the product-related revenue deferrals, but cites future supplier decisions at the combined AT&T/BellSouth as the greatest source of uncertainty. (See Tellabs Intros Cross-Connect and Tellabs Demos GPON .)

Singh notes that, while BellSouth is a major Tellabs customer for the carrier's fiber-to-the-curb (FTTC) rollout, AT&T "could decide that it wants a more homogeneous network architecture following its merger, and lean towards its own vendors." Those vendors include Alcatel-Lucent (NYSE: ALU) and Motorola Inc. (NYSE: MOT). (See Analysts See Tellabs Win at BellSouth, and Will AT&T Value BellSouth's Vendors?)

Singh also believes AT&T could alter its IPTV strategy and opt for a fiber-and-satellite combo to deliver video services, a move that would lead to lower capex on fiber deployments -- another potential hit on Tellabs' future revenues.

Tellabs isn't the only vendor to have started 2007 with disappointing financial news, with Motorola Inc. (NYSE: MOT) blaming handset margins for its shortfall woes. (See Motorola Margins 'Collapse'.)

— Ray Le Maistre, International News Editor, Light Reading

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