Tellabs Guidance Spooks Street
Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) second-quarter earnings grew 30 percent, fueled by strong sales of broadband access equipment, but a chilly-sounding forecast left many investors wondering if leaner times are on the way -- and the stock fell 16 percent. (See Tellabs Reports Q2.)
Tellabs earned a second-quarter profit of $54 million, or 12 cents per share, on revenues of $549 million, compared with earnings of $41 million, or 9 cents a share, on revenues of $463 million during the year-ago quarter.
The numbers came in modestly above analysts' expectations. A poll of 15 analysts by Thomson First Call had expected revenues of $541 million and earnings of 14 cents per share.
Tellabs says it earned $73 million or 16 cents per share when pre-tax charges for special items were excluded. Revenue from its broadband equipment business totaled $298 million, up 20 percent from $248 million in the second quarter of 2005. Analysts noted that the company’s higher-margin transport equipment business was down during the quarter, while the less-profitable broadband business accounted for most of the second-quarter growth. (See Who's Going to Buy Tellabs?)
It was the company’s growth outlook that tarnished an otherwise decent report. Tellabs said revenues would grow only 10 to 15 percent from the year earlier in the third quarter, amounting to between $510 million and $535 million. Thomson Financial analyst had expected revenues of $544.6 million.
Tellabs got smacked down $1.78 (16%) on the news to $9.22.
Tellabs CEO Krish Prabhu told analysts Thursday that slowdowns in spending in the vendor's key accounts -- read BellSouth Corp. (NYSE: BLS) -- would probably slow as that carrier consummates its union with AT&T Inc. (NYSE: T).
“They’re going through an acquisition right now, and in every acquisition I’ve seen there are incentives to rein in capital expenditures," Prabhu said. "We think that it would be risky to factor in the same level of deployment that we have enjoyed traditionally.”
Analysts believe BellSouth contributed between $220 million and $250 million worth of Tellabs revenues for the quarter.
But some investors and analysts fear that the low guidance may signal more than just a temporary hiccup in BellSouth revenue. BellSouth has been buying Tellabs gear, and a lot of it, for its fiber to the curb (FTTC) approach to broadband delivery. Tellabs’ strong quarter was driven in part by strong sales of optical network terminals (ONTs) to the carrier. But AT&T uses a different approach -- fiber to the node (FTTN). Some fear that Tellabs might be left out in the cold if AT&T requires BellSouth to conform to its approach.
Even as investors reacted negatively to the subdued outlook, Prabhu said his company’s sales to BellSouth will likely pick back up again and maybe even expand. “I’ve talked to everybody at BellSouth and everybody at AT&T, everybody that would take a meeting with me... and I have assurance that the economics are compelling, and we have no reason to believe that that is going to stop overnight.”
Some analysts weren't reassured. “I would go so far as to say that there are some genuine questions about what’s going on there,” worries analyst Joe Chiasson of Susquehanna Financial Group . “The revenue guidance was pretty weak considering where they are coming from, which is six sequential quarters of substantial growth. So this is a pretty significant step back for them, and it raises the question of whether this is a harbinger of things to come.”
Others, like Lehman Brothers analyst Marcus Kupferschmidt, saw some silver linings in the gloomy growth outlook. “We remain comfortable sales visibility for the high margin 5500 cross connect remains solid for the next few quarters, which should allay some worries,” Kupferschmidt wrote in a research note. “And we note the high margin 8800 Vivace router sales were soft again this quarter, hopefully leaving potential for a nice uptick in this high margin business in 2H06.”
There was more news to come on the gloomy Thursday.
Verizon Communications Inc. (NYSE: VZ) announced that it had chosen Tellabs as one of three vendors to supply its gigabit passive optical network (GPON) equipment. (See Alcatel Joins Verizon PON Party.) Verizon says it will begin installing the equipment first in its central switching offices and in new installations of direct fiber optic links terminating to the home. (See Tellabs Demos GPON .) But the news appeared to have had little, if any, effect in supporting Tellabs' share price.
Tellabs already supplies broadband passive optical network (BPON) gear in Verizon’s 16-state FTTP network. It also announced earlier this month that Verizon will use its 7100 optical transport system for transporting traffic in its FiOS fiber optic network. Later on, Verizon says, it will use the 7100 platform to consolidate services in its metro networks. (See Tellabs Victorious at Verizon.)
Tellabs' portfolio is divided into two main parts: transport equipment and broadband equipment. The transport equipment includes Tellabs’ popular 5500 digital crossconnect, a reconfigurable optical add/drop multiplexer (ROADM), and the 7100 transport system. Its broadband portfolio includes its line of ONTs and its 8600 and 8800 edge routers.
Tellabs employs roughly 3,700 people.
— Mark Sullivan, Reporter, Light Reading