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Tellabs Inc. witnessed bearish estimate revisions after the third-quarter 2012 earnings announcement on October 24, 2012. The downward revision in estimates is based on the fact that the company has lost a significant amount of business from its most important customer AT&T Inc. which could thereby affect Tellabs financial condition throughout 2012.

Third Quarter Recap

On October 24, Tellabs reported its third-quarter 2012 financial results. Quarterly adjusted (excluding special items) earnings per share came in at a break even, which was in line with the Zacks Consensus Estimate. On a GAAP basis, net loss in the third quarter of 2012 was $4 million or a loss of 1 cent per share compared with a net loss of $130 million or 36 cents per share in the prior-year quarter.

Tellabs generated total revenue of $264.4 million, down 19.8% year over year and also below the Zacks Consensus Estimate of $277 million. Quarterly GAAP gross margin was 39.2% compared with 41.3% in the year-ago quarter. Operating expenses, in the thirdquarter, were $105.7 million compared with $268 million in the prior-year quarter.

Agreement of Estimate Revisions

In the last 7 days, out of total 7 estimates, there were no revisions in either direction for the third quarter of 2012. Similarly, for the fourth quarter, out of total 6 estimates, no revisions were witnessed over the same time frame.

Out of total 7 estimates, six went down while none moved up for the third quarter over the last one month. For the fourth quarter, four out of 6 estimates moved south while none moved north over the same time period.

For 2012, none of the estimates witnessed any movement in the past one week. A similar picture could be seen for 2013, where out of the total 6 estimates, no estimate revisions were observed over the same time period.

In the last 30 days, five out of total 7 estimates were revised downward while only one estimate moved in the opposite direction for 2012. The bearish momentum continues in 2013, where out of the total 7 estimates, six moved south over the same time frame.

Magnitude of Estimate Revisions

Over the last 7 days, the current Zacks Consensus Estimate remained flat for the third and fourth quarter of 2012. Over the last 30 days, the current Zacks Consensus Estimate has deteriorated by 3 cents to a loss of 2 cents for the third quarter of 2012, while it decreased by 2 cents for the fourth quarter.

Over the last 7 days, the current Zacks Consensus Estimate has remained static for 2012 and 2013 at a loss of 6 cents. On the contrary, over the last 30 days, the current Zacks Consensus Estimate has deteriorated by 2 cents for 2012, while it diminished by 4 cents to a loss of 6 cents for 2013.

Our Take

Tellabs is aggressively targeting the booming mobile Internet markets since its legacy switching products are losing relevance. We believe, management’s strategic decision to thoroughly restructure its business model by emphasizing on mobile backhaul solution, IP-packet optical solution coupled with its massive headcount reduction and consolidation of research and development facilities will lead to further improvement in the company’s margins going forward. Meanwhile, the increasing competition in its core wireless backhaul solutions segment raises our concern. Moreover, Tellabs’ globally reputed high-margin digital cross-connect products continued to show a downtrend.

We, thus, maintain our long-term Neutral recommendation for Tellabs Inc. Currently, the company retains a Zacks #3 Rank, implying a short-term Hold rating on the stock.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

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