Tellabs Beats Zacks Estimates

Yesterday, after the closing bell, Tellabs Inc. (TLAB - Analyst Report) declared its financial results for the second-quarter of 2012, which surpassed the Zacks Consensus Estimates. On a GAAP basis, net loss in the second quarter of 2012 was $5.0 million or a loss of 1 cent per share compared with a net loss of $29.0 million or 8 cents per share in the prior-year quarter. Adjusted (excluding special items) earnings per share in the reported quarter came in at break-even, a penny better than the Zacks Consensus Estimate.

Quarterly total revenue of $288.1 million was down 9% year over year, and exactly in line with Zacks Consensus Estimate. All the four reporting segments of Tellabs witnessed declines in year-over-year sales.

Quarterly GAAP gross margin was 39.6% compared with 36.4% in the year-ago quarter. Operating expenses, in the second quarter, were $112.6 million compared with $150.4 million in the prior-year quarter. Quarterly operating margin was 0.6% compared with a negative 11.1% in the year-ago quarter.

During the first half of 2012, Tellabs consumed $5.6 million of cash for operations compared with $53.3 million in the first half of 2011. Free cash flow, in the first half of 2012 was a negative $15.5 million compared with a negative $85.4 million in the first half of the prior-year. Tellabs exited the reported quarter with $937.7 million of cash & marketable securities on its balance sheet compared with $976.6 million at the end of 2011. Further, there was no outstanding debt on its balance sheet.

Optical Segment

Total revenue of the Optical segment was $122.4 million, down 4.0% year over year. The decline was primarily driven by significantly lower sales from the Tellabs 5000 digital cross-connects systems. Optical segment profit was $29 million compared with $21.1 million in the year-ago quarter. The rise in segment profit was driven by increased profitability from the Tellabs 7100 transport optical system and 6300 managed transport system coupled with lower costs.

Data Segment

Total revenue generated by the Data segment was $77.7 million, down 15.7% year over year. The decline in revenue resulted from lower sales of the Tellabs 8600 managed edge systems and the Tellabs 8800 multiservice router series. The segment generated a profit of $5.4 million, as compared to a loss of $15.0 million in the prior year quarter. This was mainly due to lower research and development expenses of Tellabs SMARTCORE 9100 series.

Access Segment

Total revenue of the Access segment was $37.3 million, down 6.3% year over year. The decline in revenue was attributable to lower revenue from the Tellabs 1000 and 1100 access systems. The segment generated a profit of $6 million, down 27.7% year over year, mainly due to lower levels of revenue.

Services Segment

Total revenue of the service segment was $50.7 million, down 11.4% year over year. This decline is primarily attributable to the lower revenues generated from the deployment services and support systems. The segment generated a profit of $17.2 million, down 20.4% year over year, mainly due to lower overall revenue.

Geographic Distribution

In the second quarter of 2012, North America region generated $137.9 million (48% of total revenue) of revenue compared with $177.2 million in the prior-year quarter. The rest of the world generated the remaining $150.2 million (52% of total revenue) of revenue compared with $139.5 million in the prior-year quarter.

Future Financial Outlook

Management expects third-quarter 2012 revenue to be in the range of $260 million to $290 million. Non-GAAP gross margin is expected to be 40%, plus or minus 1 or 2 percentage points, depending on product mix. Non-GAAP operating expenses are expected to be flat with that of second quarter 2012.

Recommendation

Our major concern for Tellabs is the increasing competition in its core wireless backhaul solutions segment. The company has already lost a significant amount of business from its most important customer AT&T Inc. (T - Analyst Report). We maintain a long-term Neutral recommendation on Tellabs. Currently, the company holds a short-term Zacks #4 Rank (Sell).