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Tellabs Remains Neutral

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Tellabs Inc. reported mixed financial results for its third quarter of 2012 as net earnings managed to meet the Zacks Consensus Estimate. However, the company’s top line still remains weak as depicted by the year-over-year sales decline of all the four reporting segments. Tellabs' globally reputed high-margin digital cross-connect products continued to show a downtrend.

Nevertheless, management has taken several strategic decisions to thoroughly restructure its business model emphasizing on mobile Internet sector, including mobile backhaul solution, IP-packet optical solution and Tellabs’ Insight Analytics Services. Tellabs is aggressively targeting the booming mobile Internet markets since its legacy switching products are losing relevance. Further, the company has a healthy balance sheet as management continues its regular dividend payment. We reiterate our long-term Neutral recommendation on Tellabs.  

A significant surge in wireless data traffic is forcing the wireless operators to continuously upgrade their networks. This trend will persist in the long run since mobile Internet is flourishing all over the world through smartphones, tablets and machine-to-machine communications. The next-generation (4G) LTE network becomes another growth area for the company. Over the next five quarters, Tellabs will reduce its headcount by 200, which will result into a cost savings of $20 million per annum. As a result of cost streamlining, Tellabs is expected to improve its margins going forward.

Meanwhile, Tellabs faces a high level of customer concentration. Two customers, viz AT&T Inc. (T - Free Report) and Verizon Communications Inc. (VZ - Free Report) , accounted for more than 33% of total revenue. Loss of any of these customers will have a significant material impact on the company’s top line.

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