Earning Scorecard: Tellabs Inc.

May.17.10 | About: Tellabs, Inc. (TLAB)

Future Outlook is bright for Tellabs Inc. (NASDAQ:TLAB). The earnings revision trend is quite favorable for the company. Ever since the company declared its first quarter 2010 financial results on April 27, more than half of the analysts covering the company have made upward revision to their estimates.

This significant positive sentiment may come from huge growth of Tellabs’ new technology products popularly known as “Growth” products that help the company to stabilize its overall businesses.

First Quarter Highlights

Tellabs’ first quarter earnings beat the Zacks Consensus Estimate by 2 cents and revenue also exceeds by 2.7%. The rise in year-over-year revenue is the result of higher sales for both Broadband and Services segment products partially offset by a decline in the Transport segment revenue.

Quarterly gross margin was 50.7% compared to 44.2% in the year-ago quarter. This reflects a favorable product-mix for high-margin Data products. First quarter operating margin of 9.5% was highest since 2006.

Growth products now constitute 57% of total revenue. Tellabs is expecting that growth products will account for more than half of the total revenue in full fiscal 2010 that prompted the company to predict more than 10% sequential growth of its top-line in the future reporting quarters.

Agreements of Analysts

Of the 11 analysts covering the stock, in the last 30 days, 7 of them revised their estimates upward for both the ensuing second quarter and the following quarter. Furthermore, 10 and 7 analysts raised their estimates for full fiscal 2010 and 2011 respectively during the same time period. What is important is that none of the analysts made any negative estimate revision either for any quarter or any fiscal year during the same period.

It seems that most of the analysts are convinced regarding the growth prospect of Tellabs’ next-generation advanced IP-access (growth) products. Management has decided to substantially focus on the growth areas of mobile backhaul solutions, optical networking solutions, and business services solutions.

Mobile backhaul solutions will support massive demand for mobile Internet and video and will enable telecom customers a smooth transition to 3G or next-generation 4G networks. Optical networking solutions will enable the carriers to meet the growing demand for bandwidth for metro-Ethernet networks. Business services solutions, on the other hand, will serve large enterprises that need reliable multimedia services.

Currently, the Zacks Consensus EPS Estimate for the second quarter is 12 cents. If that materializes it would result in a substantial growth of 48.9% year-over-year. Similarly, for full fiscal 2010, the current Zacks Consensus EPS Estimate of 44 cents indicates a whopping gain of nearly 63% year-over-year.

With respect to earning surprises, Tellabs produced an impressive average earnings surprise of nearly 30% in the last four quarters, which means that it beat the Zacks Consensus Estimate by that measure over the past one year.

Magnitude of Estimate Revisions

In synergy with the strong upward revision of estimates recently, the Zacks Consensus Estimate has moved up by 5 cents, in the last 30 days, for the ensuing second quarter and by 3 cents for the following quarter. Accordingly, for full fiscal 2010, the Zacks Consensus Estimate moved up 13 cents in the last 30 days and full fiscal 2011 Zacks Consensus Estimate also moved up 14 cents.

Remain Neutral on Tellabs

We remain positive regarding the growth products of Tellabs 7100 and 7300 optical networking system, 6300 transport system, 8600 and 8800 managed-edge multi-service routers, and Tellabs 9100 SmartCore platform. We also believe the acquisition of WiChorus will be incrementally positive for Tellabs’ long-run growth. Integration of SmartCore with Tellabs’ existing IP mobile backhaul solution and intelligent network manager will create a formidable player in the industry

Despite the above positives, some near-term concerns also remain. Geographically, sales in the North America region remain disappointing. Tellabs’ Access and Managed Access products have suffered setbacks. We also remain concerned regarding the near-term opportunity for the company’s high-margin digital cross-connect products.

We thus maintain our Neutral recommendation for Tellabs.