We upgrade our recommendation to Neutral on Tellabs Inc. ( TLAB - Analyst Report ) . Tellabs met the Zacks Consensus Estimates in its fourth-quarter 2011 financial results. In the last quarter, the company witnessed solid improvements with respect to several valuation metrics. Management has taken a strategic decision to thoroughly restructure its business model emphasizing smart mobile Internet, including mobile backhaul solution, packet optical solution and Tellabs’ Insight Analytics Services.

For the last year, Tellabs has aggressively targeted the mobile Internet market since its legacy switching products are gradually losing relevance.Tellabs’ globally reputed high-margin digital cross-connect products continued to show a downtrend, while significantly affecting its bottom line. Nevertheless, the company has a healthy balance sheet as management continues its regular dividend payment.

In the previous quarter, Tellabs won several contracts for its growth products throughout the world. The company won 11 new contracts for its Optical 7100 and 7300 systems. It also won 2 new contracts for 8600 and 8800 systems. At present, Tellabs has over 160 mobile backhaul customers globally. Currently, Tellabs services 25 mobile packet core customers. Tellabs expects its first revenue from Insight Analytics services in late 2012.

Tellabs is facing serious problems in its core wireless backhaul solutions segment. AT&T Inc. ( T - Analyst Report ) was its major customer for its 8800 multi-service router. However, AT&T decided to upgrade its network with pure Ethernet solutions since the company is moving toward deploying 4G LTE networks. As a result, AT&T is at present using Ethernet routers of Cisco Systems Inc. ( CSCO - Analyst Report ) and Alcatel-Lucent ( ALU - Analyst Report ) instead of Tellabs. AT&T historically generated 35% of the company’s total sales and 40% of Data product revenue. We believe loss of businesses from AT&T will have severe consequences on Tellabs’ financial condition in 2012.