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We downgrade our recommendation on Tellabs Inc. to Underperform ahead of its second-quarter 2013 financial results. We do not find any immediate growth catalyst and consequently do not expect Tellabs to achieve profitability anytime soon. Tellabs currently has a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Tellabs’ woes persist as it continues to perform disappointingly. The company’s globally reputed high-margin digital cross-connect products are gradually showing a downtrend. Management provided a weak financial guidance for second-quarter 2013. The non-GAAP gross margin guidance is just 36%. The total revenue is expected to decline by around 27% year over year. The board of directors of Tellabs decided to stop dividend payment in the last reported quarter.

Tellabs is aggressively targeting the mobile Internet market since its legacy switching products are quickly losing relevance. The company is emphasizing on mobile backhaul solution, IP-packet optical solution and Insight Analytics Services. Unfortunately, the global macroeconomic fluctuations may hinder its speed of recovery.

In the last reported quarter, Tellabs suffered severe top-line setback, which declined nearly 19% year over year. Except the Access segment, the remaining three segments of the company witnessed sales declines. Furthermore, revenue fluctuation indicates tougher times for the company.

Other Stocks to Consider

While we prefer to avoid Tellabs until we see signs of improvement in the company's performance, other telecom gear manufacturing stocks that warrant a look are Motorola Solutions Inc. (MSI - Analyst Report), Sonus Networks Inc. (SONS - Snapshot Report) and ViaSat Inc. (VSAT - Snapshot Report). All these stocks current carry a Zacks Rank #2 (Buy).

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