Tellabs, Inc. ( TLAB - Analyst Report ) , is slated to release its third quarter 2011 results on Tuesday, October 25, before the opening bell. The current Zacks Consensus Estimate for the third quarter is pegged at a loss of 2 cents, representing an annualized negative growth of 109.38%.

With respect to earnings surprises over the trailing four quarters, Tellabs has outperformed the Zacks Consensus Estimate in two of the last four quarters. The average earnings surprise was negative 42.46%.

Second Quarter Recap

On July 26, 2011, Tellabs reported its second quarter 2011 financial results. Total revenue of $334.2 million was down 21% year over year and was also below the Zacks Consensus Estimate of $339 million. Lower revenue from North America was primarily responsible for the poor performance, partially offset by higher international revenues.

On a GAAP basis, net loss in the second quarter of 2011 was $20.1 million or 6 cents per share compared with a net income of $64.1 million or 16 cents per share in the prior-year quarter. Adjusted (excluding special items) EPS in the reported quarter was a loss of 3 cents, in line with the Zacks Consensus Estimate.

GAAP gross margin was 37.4% compared with 53.5% in the year-ago quarter. The massive decline in gross margin was mainly attributable to higher cost of revenue in the Product segment.

Agreement of Estimate Revisions

In the last 30 days, out of the 12 analysts covering the stock, one analyst increased the EPS estimate for the third quarter of 2011 while one reduced the same. For the fourth quarter of fiscal 2011, out of the 10 analysts covering the stock, one analyst increased the EPS estimate but none decreased the estimate.

For fiscal 2011, in the last 30 days, out of the 13 analysts covering the stock, one analyst increased the EPS estimate and one analyst moved in the opposite direction. Likewise, for fiscal 2012, out of the 12 analysts covering the stock, none increased or decreased the EPS estimates.

Magnitude of Estimate Revisions

During the last 30 days, the Zacks Consensus Estimate was one cent below the current estimate of a loss of 2 cents in the third quarter of 2011 but was break-even in the fourth quarterof 2011. Similarly for fiscal 2011, the Zacks Consensus Estimate was in line with current estimate of 9 cents, while for fiscal 2012, the Zacks Consensus Estimate was just a penny above the current estimate of 3 cents.

Earning Surprises

In the previous quarter, Tellabs reported loss per share of 3 cents, which was at par with the Zacks Consensus Estimate. The current Zacks Consensus Estimates for the third quarter as well as for the next quarter contain 0.00% upside potential (essentially a proxy for future earning surprises). Similarly, for fiscal 2011 and 2012, the Zacks Consensus Estimate downside potentials are 11.11% and 333.33%, respectively.

Our Recommendation

Continuous loss of legacy business coupled with weak financial outlook and severe competitive pressure from large rivals such as Cisco Systems, Inc. ( CSCO - Analyst Report ) and Alcatel-Lucent ( ALU - Analyst Report ) will act as headwinds for the stock. Furthermore, the company is on the verge of losing its key customer AT&T ( T - Analyst Report ) , which we believe will remain an overhang on the stock.

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