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We downgrade our recommendation on Tellabs Inc. ( TLAB - Analyst Report ) to Underperform, ahead of its third-quarter 2011 financial results. The downgrade is backed by our assessment that the poor performance of the company will continue in the near future. Tellabs’ woe continues as the company posted weak financial results for the second quarter of 2011 and also provided a tepid outlook for the ensuing third quarter.
The company’s globally reputed high-margin digital cross-connect products are still showing a downtrend, while significantly affecting its bottom line. Furthermore, the company is facing serious problems as its key customer AT&T Inc. ( T - Analyst Report ) is moving away, which led to 35% of total revenue in 2010. Tellabs is aggressively targeting the mobile Internet market since its legacy switching products are gradually losing relevance. Unfortunately, global ongoing macro-economic fluctuations may hinder the company’s speed of recovery.
Tellabs has given a dismal financial outlook for the third quarter of 2011. Revenue guidance was below the consensus estimates and gross margin guidance is a pathetic 39%, a significant fall from 53.5% in the prior-year quarter. Total revenue is expected to decline by around 22% year over year, indicating that a gloomy scenario is looming large. This dismal condition resulted from the continuous decline in sales of Tellabs’ legacy products and its newly launched growth products while intensifying the competition further.
Tellabs has decided to expand globally. Although international revenue is grossly offsetting the loss of revenue in North America, Tellabs is facing margin pressure. The company is forced to sell its growth products at lower margin in these regions in order to capture market share.
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