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We reiterate our long-term Neutral recommendation on Tellabs Inc. following mixed financial results of the company’s fourth quarter of 2012. While earnings per share came slightly ahead of the Zacks Consensus Estimate, revenue fell short of the same.
Why Remains Neutral
A continuous fluctuation in Tellabs’ top line is the major problem for the company. In the reported quarter, sales declined year-over-year in all the four reporting segments. Tellabs’ high-margin digital cross-connect products are gradually showing a downtrend. Nevertheless, management has taken several strategic decisions to restructure Tellabs’ business model emphasizing the mobile Internet sector and its Insight Analytics Services.Meanwhile, the stock price of Tellabs declined 50% in the last year and is currently trading at the low-end of its 52-week price range. We believe this low-level of valuation may act as a cushion for further downslide of the stock price. Tellabs currently has a Zacks Rank #3 (Hold).
Risk – Reward Virtually Balanced
Tellabs is facing serious problems in its core wireless backhaul solutions segment. AT&T Inc. (T - Analyst Report) was the major customer for its 8800 multi-service router. AT&T decided to upgrade its network with pure Ethernet solutions since it is aggressively deploying 4G LTE networks and thus shifted to other vendors. AT&T historically generated 35% of Tellabs’ total sales and 40% of Data product revenue. Loss of business to AT&T had a significant adverse effect on Tellabs. Comparing year over year, Data product revenue shrank 48% in the fourth quarter. AT&T currently has a Zacks Rank #3 (Hold).
However, Tellabs is trying hard to expand is global reach to make up for losses incurred from AT&T. During 2012, Tellabs won a series of new contracts. The company added 18 new Tellabs 8600 and 8800 customers. These products are used for mobile backhaul solutions. Tellabs won 19 new optical customers. The company already offers 10 Gbps, 40 Gbps and 100 Gbps Ethernet switches. Currently, its product pipeline contains a 400 Gbps switch. Additionally, the company won 10 new customers in 2012 for its Access products.
Other Stocks to Consider
Other stocks to consider in the telecom network infrastructure segment are LM Ericsson (ERIC - Analyst Report)) and Juniper Networks Inc. (JNPR - Analyst Report). Ericsson currently has a Zacks Rank #1 (Strong Buy) whereas Juniper carries a Zack Rank #2 (Buy).