Tellabs Beats Estimates and Initiates Dividend

| About: Tellabs, Inc. (TLAB)

Tellabs (NASDAQ:TLAB), which sells its products and services to telecom providers to help them manage increased traffic on lines, reported its fiscal fourth quarter results on Tuesday morning and their stock surged nearly 13%. The company reported net income of $62 million or $.16 per share which compares very favorably to the $13 million or $.03 per share earned a year ago. When adjusted for the one-time benefits of favorable tax treatment and other one-time events, the company earned $36 million or $.09 per share. This result still beat consensus analysts’ EPS estimates of $.07 even though revenue came in a little bit lighter than expected at $389.3 million as sales from the Broadband segment disappointed falling 15.7%.

The market is shaking off the slight revenue disappointment because there were other positive developments in Tellabs’ report. For one, the company has initiated a quarterly dividend of $.02 per quarter which, based on Monday’s close, would imply a yield of 1.3% right off the bat. Tellabs is able to offer this dividend because of its ability to generate cash-flow ($188.5 million for the year) and the fact that it has $1.1 billion in cash on hand and zero long term debt. The company also said that they spent about $22 million in share repurchasesTLAB over the last quarter for an average price of around $6.40 per share. In addition to these shareholder-friendly corporate actions, they are undergoing a restructuring that will likely result in reducing about 200 positions over the next five quarters, although Tellabs said it does expect overall headcount to increase in the year ahead.

Management has aggressively cut operating costs in the last year which dropped to $141.1 million from $163.4 million and enabled the company to raise gross margin impressively to 45.3% from 41.6%. Operating margins reached 9% in the quarter which was the highest level since 2006. For the quarter ahead, Tellabs expects further gross margin expansion to 48.5%. The trend shows improved profitability which is great considering management sees revenue of around $370 million in the next quarter which is better than most analysts expected and 2.3% better than last year.

At Ockham, we actually just downgraded Tellabs to Fairly Valued coming into this week, but these results were stronger than we had expected. The new dividend, even though it is not huge to start, will also be a positive factor in our analysis going forward. We are not concerned by the slower than expected sales because profitability is much more attractive thanks to effective restructuring and cost management. We anticipate demand for Tellabs technology will only increase in the future as we expect consumers to demand more from data services on their mobile devices in particular. Management’s outlook for further improvement to margins in the quarter ahead supports this theory, so we may have to turn back on our downgrade in the coming report despite today’s run-up.

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