Tellabs Beats, Restructuring Ahead

Tellabs Inc. ( TLAB - Analyst Report ) declared fourth-quarter 2011 financial results before the opening bell today, beating the Zacks Consensus Estimates. Management has strategically decided to thoroughly revamp its business model emphasizing on smart mobile Internet, including mobile backhaul solution, packet optical solution and Tellabs’ Insight Analytics Services. For this, the company will reduce its present headcount by around 530 people and will incur approximately $107 million of pretax charges in the first quarter of 2012. In a major decision, Tellabs has decided to abandon its SmartCore 9100 LTE project, but will continue its existing SmartCore 9100 WiMAX project.

Quarterly total revenue of $316.8 million was down 22.8% year over year, but managed to surpass the Zacks Consensus Estimate of $315 million. Although international revenue increased, lower revenue from North America is the primary reason for this poor performance year over year. All the three reporting segments of Tellabs witnessed sales reductions.

On a GAAP basis, net loss in the fourth quarter of 2011 was $4.9 million or a loss of 1 cent per share compared with a net loss of $10.9 million or 3 cents per share in the prior-year quarter. Adjusted (excluding special items) EPS in the reported quarter was a break-even, better than the Zacks Consensus Estimate of a loss of 2 cents.

GAAP gross margin was 42.5% compared with 38% in the year-ago quarter. Operating expenses, in the reported quarter, were $137.9 million compared with $162.5 million in the prior-year quarter. The fourth quarter of 2011 operating margin was a negative 1.1% compared with a negative 1.6% in the year-ago quarter.

During fiscal 2011, Tellabs consumed $49.1 million of cash for operations compared with a cash generation of $288.8 million in fiscal 2010. Free cash flow in fiscal 2011 was a negative $114.3 million compared with $233.2 million in fiscal 2010. At the end of fiscal 2011, Tellabs had $976.6 million of cash & marketable securities on its balance sheet compared with $1,134.5 million at the end of fiscal 2010. Tellabs’ balance sheet had no outstanding debt.

Broadband Segment

Total revenue of the Broadband segment was $166.3 million, down 26.7% year over year. Within this segment, Data Product revenue was $76.4 million, down 36.3% over the year-ago quarter. Access revenue was $43.2 million, down 37.9% over the prior-year quarter. Managed Access revenue was $46.7 million, up 24.5% year over year.

Broadband segment profit was $15.9 million compared with $33.8 million in the year-ago quarter. The huge decline in segment profit was driven by lower revenue from data products and higher R&D expenses.

Transport Segment

Total revenue of the Transport segment was $91.5 million, down 25.8% year over year. Decline in revenue resulted from lower sales of digital cross-connect products and optical transport systems. The segment generated a profit of $19 million, down 19.1% year over year. This was mainly due to lower revenue from high-margin digital cross-connects.

Services Segment

Total revenue of the Services segment was $59 million, down 2% year over year. Decline in revenue was attributable to lower deployment services revenue in North America. The segment generated a profit of $20.9 million, up 13% year over year, mainly due to higher professional and support services revenue.

Geographic Distribution

In the fourth quarter of 2011, North America region generated $146.1 million (46% of total revenue) of revenue compared with $240.5 million in the prior-year quarter. The rest of the World generated the remaining $170.7 million (54% of total revenue) of revenue compared with $170 million in the prior-year quarter.

Portfolio Distribution

In the fourth quarter of 2011, Growth products generated $170.9 million of revenue compared with $231.4 million in the prior-year quarter. Growth products now constitute 54% of total revenue. Core products generated the remaining $145.9 million compared with $179.1 million in the prior-year quarter.

Future Financial Outlook

Management expects its first-quarter 2012 revenue to be in the range of $260 million to $290 million. Non-GAAP gross margin is expected to be 39%, plus or minus 1 or 2 percentage points, depending on product mix. Non-GAAP operating expenses are expected to be in the mid $120 million range.

Recommendation

Our major concern for Tellabs is the increasing competition in its core wireless backhaul solutions segment. Tellabs already lost significant amount of business from its most important customer AT&T Inc. ( T - Analyst Report ) . Currently, we maintain a long-term Neutral recommendation on Tellabs. However,the company has a short-term Zacks #3 Rank (Hold) on the stock.