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Optical/IP

Ma Bell Merger Thumps Tellabs

Carrier consolidation is continuing to haunt some telecom equipment makers. And the big question for Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) is: How long will the pain continue?

The fourth quarter of 2006 was a rough one for the broadband access and digital switching provider. And the first quarter of 2007 isn't looking any better. (See Tellabs Reports 4Q06.)

In the fourth quarter, Tellabs earned $29 million, or 7 cents a share, on revenues of $455 million. Compared to the year ago quarter, revenues were down 13 percent and profits had fallen by 68 percent.

Tellabs is not expecting any improvement in the immediate months of 2007. "Tellabs expects first-quarter 2007 revenue to be flat to slightly down from the fourth quarter of 2006," the company stated in its earnings release.

The company acknowledged that carrier consolidation played a major role in the disappointing earnings as capital spending declined amid the uncertainty surrounding the AT&T Inc. (NYSE: T) and BellSouth Corp. (NYSE: BLS) merger. (See Wall Street Frets About BellSouth Suppliers).

It's worth noting, too, that Tellabs is not the only company to be hurt by this. Alcatel-Lucent (NYSE: ALU) also announced disappointing revenues today and it, too, listed the big carrier merger as one of its problems. (see Alcatel-Lucent Suffers Stock Shock .)

A flat-to-down 2007 first quarter plays right into how Light Reading feels Tellabs will be positioned for the rest of the year. (See Top Ten Telecom Stocks.) Of course, several folks who have taken our current poll say Tellabs was the worst stock pick in our Top Ten. (See Bull or Bear?)

But Tellabs remains optimistic that 2007 could be a rebound year. "We plan to work with AT&T to upgrade part or all of the 1.5 million fiber lines in BellSouth's territory to provide IPTV service," said Tellabs president and CEO Krish A. Prabhu on this morning's conference call.

Analysts remain skeptical that these revenues will return to previous levels and cautious over the stock's history of volatility. UBS AG analyst Nikos Theodosopoulos maintained a rating of Neutral on the stock with a price target of $12, in a research report released today.

Prudential Equity Group LLC analyst Inder Singh, in a note this morning, wrote that Tellabs' revenue delays stemming from AT&T "may continue beyond the March quarter".

Singh notes that Tellabs will undoubtedly feel pressure this year as its competitors get bigger amidst the ongoing consolidation in the market. That could make it a more likely target for acquisition.

Tellabs shares were down $0.07 (0.70%) to $9.95 in late afternoon trading on Tuesday.

— Raymond McConville, Reporter, Light Reading

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