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Tellabs Falls Short in Q3

Light Reading
News Analysis
Light Reading
10/26/2004

Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) disappointed the market with its third-quarter results this morning, missing analysts' expectations for revenues and earnings (see Tellabs Reports Q3 Growth).

Its share price dipped by 37 cents, more than 4 percent, to $8.42 in early morning trading.

Tellabs posted revenues of $284.3 million, compared with the $300.4 million that analysts were expecting. The vendor did make a profit of $45.9 million, a distinct improvement on the $64.8 million net loss from the same quarter a year earlier, but down from the profit of $50 million in the second quarter (see Tellabs Revenue Grows to $304M).

Earnings per share (EPS) was 11 cents, compared with the 12 cents analysts had predicted.

But what of the ongoing Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI) acquisition saga, which has had its ups and downs since it was first announced? (See Honey, I Shrunk the Price and Tellabs Calm Over AFC Hiccup.) CEO Krish Prabhu told a conference call this morning that it's set to close in the current quarter, dependent on approval by AFC's shareholders.

AFC, which also disappointed with its latest quarterly results announced Monday evening, has called a shareholder meeting for November 30 to vote on the acquisition (see AFC Posts Q3 Profit). Should they vote in favor, as is expected, the deal will close "almost instantaneously," said Prabhu. "I have high confidence that will happen."

He also noted that Tellabs was "going to be more aggressive on cost synergies" that could come from the merger, and that a number of significant cost savings had already been identified, though he couldn't comment further, or say how Tellabs would treat the costs of the acquisition and subsequent integration of the two companies.

While the impending merger is clearly key to Tellabs' future, Prabhu needs to keep a close eye on the ongoing business, as the third quarter's revenue shortfall took the Tellabs team, as well as Wall Street, by surprise. Prabhu and his team had predicted between $295 million and $305 million in revenues -- so what went wrong?

The CEO says it was "largely related to a manufacturing transition in Europe" that affected the firm's output of managed access products. Tellabs has shifted some of its outsourced manufacturing from Finland to Estonia, and "during that transition we couldn't meet our demand. It's not a component issue, and we hope to have it fixed soon and pick up again in the fourth quarter."

CFO Tim Wiggins says this affected between $10 million and $12 million worth of sales, and those are set to be shipped and accounted for in the current quarter. He added that the revenues total was also hit by lower than anticipated transport equipment sales to North American wireless carriers.

Prabhu noted that T-Mobile USA was being cautious with its capital expenditures at present, and that the ongoing merger of AT&T Wireless Services Inc. (NYSE: AWE) and Cingular Wireless has "frozen some capex spending."

Wiggins added that Tellabs expects revenues of between $300 million and $315 million in the current quarter, including the revenues from the managed access unit that didn't make it into the third quarter. That could lead to further analyst unrest: The average expectation for fourth-quarter revenues had been for more than $333 million.

Prabhu, though, was keen to focus on some positive signs within the business. He talked up the vendor's fledgling data product line, which largely consists of the Vivace products acquired last year (see Tellabs Snags Vivace for $135M and Tellabs Unveils Vivace Sibling).

He said that the $8.5 million in revenues in the third quarter was the highest to date, and that three customers had contributed "recurring revenues," while another eight had contributed "initial revenues."

In addition, said the CEO, 18 carriers have completed trials of the 8800 multiservice router, and another 26, including some RBOCs, are in various stages of ongoing trials.

— Ray Le Maistre, International News Editor, Light Reading

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