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Tellabs, Inc. (NASDAQ:TLAB), is slated to release its second quarter 2011 results on Tuesday, July 26, before the opening bell. The current Zacks Consensus Estimate for the second quarter is pegged at a loss of 3 cents, representing an annualized decline of 115.22%.

With respect to earnings surprises over the trailing four quarters, Tellabs missed the Zacks Consensus Estimate in two quarters while beating the same in the other two quarters. The average earnings surprise was negative 21.43%.

First Quarter Recap

On April 26, 2011, Tellabs reported its first quarter 2010 financial results. Total revenue of $322.4 million plunged 15% year over year, missing the Zacks Consensus Estimate of $339 million. Lower revenue from North America is the primary reason for this poor performance, partly mitigated by an increase in international revenue.

On a GAAP basis, net loss in the first quarter of 2011 was $24.1 million or a loss of 7 cents per share compared with a net income of $45.6 million or an income of 12 cents per share in the prior-year quarter. Adjusted (excluding special items) EPS in the reported quarter was a loss of 5 cents, wider than the Zacks Consensus Estimate of a loss of 3 cents.

GAAP gross margin was 37.9% compared with 50.6% in the year-ago quarter. Massive declines in gross margins were mainly attributable to higher cost of revenue for both Product and Services segments.

Agreement of Estimate Revisions

In the last 30 days, out of the 17 analysts covering the stock, one analyst increased the EPS estimate for the second quarter of 2011 while two analysts reduced their estimates. Similarly, for the third quarter of fiscal 2011, out of the 15 analysts covering the stock, one analyst increased the estimate while two analysts decreased the same.

For fiscal 2011, in the last 30 days, out of the 18 analysts covering the stock, one analyst increased the EPS estimate but two analysts moved in the opposite direction. Likewise, for fiscal 2012, out of the 16 analysts covering the stock, one analyst increased the EPS estimate while two analysts reduced their estimates.

Magnitude of Estimate Revisions

During the last 30 days, the Zacks Consensus Estimate was a penny shy of the current estimate of a loss of 3 cents for the second quarter of 2011 but was in line with the current estimate of 1 cent, for the third quarter of 2011. Similarly, for fiscal 2011, the Zacks Consensus Estimate was a penny short of the current estimate of a loss of 7 cents. For 2012, the Zacks Consensus Estimates was in line with the current estimate of 3 cents per share.

Earning Surprises

In the previous quarter, Tellabs reported a loss of 4 cents per share, which was just a penny above the Zacks Consensus Estimate. The current Zacks Consensus Estimates for the second quarter as well as for the next quarter contains a 33.33% and 200.00% downside potential (essentially a proxy for future earning surprises). Similarly, for fiscal 2011 and 2012, the Zacks Consensus Estimate downside potential is 71.43% and 33.33%, respectively.

Our Recommendation

The company is facing severe challenges regarding its key customer AT&T (NYSE:T), which accounted for 35% of the total revenue in 2010. We believe Tellabs will continue to lose businesses from AT&T as depicted by its weak revenue outlook for the second quarter of 2011. The company is aggressively targeting the mobile Internet market since its legacy switching products are gradually losing relevance. Moreover, Tellabs is also facing intense competition from bigger rivals such as Cisco Systems, Inc. (NASDAQ:CSCO) and Alcatel-Lucent (NYSE:ALU).

We, thus, maintain our long-term Underperform recommendation for Tellabs. Currently, Tellabs has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

Source: Tellabs Earnings Preview