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Optical/IP

Optical Mix Nips Tellabs Margins

Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) may find that its reward for helping carriers build fatter pipes isn't necessarily a fatter profit margin.

One analyst today changed his forecast for the company, citing margin slips that could occur as newer optical gear becomes a larger part of its overall sales.

JP.MorganChase analyst Ehud Gelblum, in a research note issued this morning, pointed to a shift in Tellabs' sales mix, including a decline in its high-margin crossconnect business being offset by low- or no-margin optical products.

Gelblum wrote that reductions in 2007 and 2008 gross margin and EPS estimates reflected "a bigger drain [than] we had previously expected from the 0%-gross margin 7100 optical ROADM product."

J.P. Morgan cut its first- and second-quarter gross margin estimates and said Tellabs will see its margins drop to a nine-year low of 38.0 percent in the second quarter as it recognizes about $50 million in deferred sales of 7100 systems to Verizon Communications Inc. (NYSE: VZ). (See Verizon Picks Tellabs and Tellabs Victorious at Verizon.)

Along with the dilution of margins due to sales of the company's low-margin optical products, Gelblum sees a reduction in sales of Tellabs' crossconnects.

"We continue to believe revenues from TLAB's high-margin, bread-and-butter 5500 cross connect have peaked and are at the beginning of a long-term secular decline starting with 2007 revenue which we expect to be down 11% from 2006," Gelblum wrote.

Representatives of Tellabs declined to comment on the report.

Light Reading selected Tellabs as one of its Top Ten Telecom Stocks for 2007, but today its shares slipped $0.10 (0.98%) to $10.12 in mid-afternoon trading. (See Top Ten Telecom Stocks.)

— Ryan Lawler, Reporter, Light Reading

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