Tellabs on a Roll

Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) lived up to its own high hype today with second-quarter results that once again beat expectations, and the vendor predicted further strong business for the current three-month period due to ongoing demand from mobile operators for its transport gear. (See Tellabs Reports Q2.)

But hints of a potentially weakening position at one of the vendor's biggest customers, AT&T Inc. (NYSE: T), hit its share price.

In April, Tellabs reported first-quarter revenues of $379.7 million, a gross margin of 50.7 percent, and earnings per share of 12 cents, and predicted a sequential hike in quarterly revenues of 10 to 12 percent. (See Tellabs Busts Out in H1.)

And today, it delivered, with second-quarter revenues of $422.7 million, up 11.3 percent from the first quarter and up 10 percent from a year ago, and slightly better than analysts had predicted. Net income was $64.1 million, up from $15.7 million a year earlier.

The vendor also reported earnings before one-time costs and exceptional items of 17 cents per share, better than the 13 cents predicted by analysts, and a gross margin of 53.5 percent, even better than in the first quarter, and up from 43.5 percent a year ago.

Tellabs also said it expects its third-quarter revenues to reach $425 million to 435 million, way ahead of Wall Street's expected $416 million.

The vendor's share price was up by about 5.9 percent in early trading, but reversed following the company's earnings call, and by mid-morning was down 47 cents, more than 6 percent, to $7.32.

That's because analysts are nervous about future business at AT&T, which generates around 20 percent of its revenues. Tellabs is currently a supplier of mobile backhaul transport gear -- its 8600 and 8800 products -- at AT&T, and is currently one of two backhaul suppliers, along with Ciena Corp. (NYSE: CIEN), cleared for the operator's planned Long Term Evolution (LTE) network rollout.

But CEO Rob Pullen told today's conference call that AT&T is trialing a third backhaul vendor for its LTE network, and that this third vendor -- not identified by Pullen, but believed to be Alcatel-Lucent (NYSE: ALU) -- is a serious rival, not just in the LTE network, but also for AT&T's ongoing 3G backhaul expansion.

Suggestions that Tellabs' position at AT&T is under pressure has already spooked investors this year. (See Tellabs Feels the AT&T Squeeze.)

Currently, though, the company is riding on a wave of recovery in North America, where carrier spending has returned more quickly than in other regions: In the second quarter, $330.2 million of its revenues, or 78 percent of the total, came from North America.

The company is also selling more of its new product lines, which it calls its "growth portfolio." That includes the 8600 and 8880 backhaul transport lines, the 6300 managed transport system, 7100 optical transport system, 7300 metro Ethernet switch, SmartCore 9100 mobile packet core platform (formerly the WiChorus line), and professional services. Together, those products and services generated $243.9 million in revenues, or 58 percent of the total, compared with 52 percent of sales a year ago. (See Core Blimey! Tellabs Buys WiChorus.)

Pullen said Tellabs now has 10 customers for the mobile packet core product, and the vendor is expecting a ramp in business in the second half of this year.

— Ray Le Maistre, International Managing Editor, Light Reading