Tellabs Mum on M&A Talks

Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) managed two impressive feats today.

First, it beat its own, and Wall Street's, estimates for its second quarter. (See Tellabs Reports Q2.)

Second, its CEO and CFO managed to get through an hour-long conference call with hardly any reference to potential acquisition talks, only one day after Nokia Networks was identified as a possible suitor. (See Is Nokia Siemens Tailing Tellabs?)

On Monday, that talk sent the company's share price as high as $14 (up 18 percent) in pre-market trading, though by the close it stood at $12.20, up $0.35, or nearly 3 percent.

But that wasn't enough to tempt financial analysts into any probing today. Despite an extensive set of questions, CEO Krish Prabhu and CFO Tim Wiggins were never asked directly about any potential acquisition talks or activity. One analyst contacted by Light Reading said he thought everyone knew they'd get a "no comment" answer.

Only once did the Nokia Siemens issue crop up, when one analyst raised the issue of Tellabs' plans to return more of its cash to investors, something the company had previously suggested it might do (in addition to an ongoing share buyback).

When asked whether any such plans might be on hold because of "strategic discussions," Prabhu stumbled initially before saying he wasn't qualified to comment, while CFO Wiggins noted that, "on a hypothetical basis," being involved in "strategic discussions" could hold up plans to return more of the vendor's $1.32 billion cash pile.

Instead, today's focus was on the impact of major U.S. carriers on Tellabs income following the second quarter's revenues of $535 million and net income of $30 million, or 7 cents per share. Those numbers beat the vendor's previous guidance for the quarter, and Wall Street's expectations of about $513 million in revenues and earnings of 6 cents, and helped to send Tellabs' share price up by another $0.74, more than 6 percent, to $12.94.

Those expectations, and Tellabs' guidance, had included deferred revenues of about $70 million (flagged in the company's first-quarter earnings call) from sales of the company's 7100 ROADM product to "one major customer," which the vendor didn't explicitly name, but which everyone knows is Verizon Communications Inc. (NYSE: VZ). (See Verizon Biz Net Promotes Caring, Not Sharing , Tellabs Earnings Drop on Access, and Tellabs Victorious at Verizon.)

The problem for Tellabs is that the Verizon deal isn't making it any money, as the 7100s were sold "at essentially a breakeven level," the vendor noted in its earnings release.

It's also still suffering in general from the RBOC consolidation process. "Two of our top five customers from the second quarter of 2006 have merged, and that has slowed spending… We saw some recovery in the second quarter, but there's some way to go yet," said Prabhu. Tellabs generated $413 million of its revenues in North America, about 77 percent of its total second-quarter sales.

In the meantime, Tellabs is looking for ways to help boost its bottom line, and it has a plan for its ONT product line. Prabhu said on today's earnings call that the company is looking for an ODM (original device manufacturer) partner for its single-family ONT that it supplies to carriers like Verizon for their fiber-to-the-home rollouts. (See Verizon Eyes Smaller ONTs and Tellabs Hits Milestone.)

He said price pressures in the ONT market mean Tellabs needs to find ways to cut costs, and "an ODM partner will help us boost our margins. We're in the middle of discussions." If those talks go well and a deal is struck soon, Tellabs cold see the margin benefit by the middle of 2008.

Tellabs reported gross margins of 35.1 percent in the second quarter, a figure depressed by high volumes of low-margin ONT sales and the revenues from the 7100 optical contract. It expects its third-quarter margins to be around 36 percent, as ONT sales remain strong, and revenues to be around the $500 million mark.

— Ray Le Maistre, International News Editor, Light Reading

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