UPDATE 4-Tellabs shares soar on high margin, solid outlook

Tue Jan 26, 2010 11:39am EST

* Analysts impressed by Q4 gross profit margin of 45.3 pct

* Q4 revenue $389 mln vs Street view of $391 mln

* Sees Q1 rev $370 mln +/- 2 pct vs Street's $365 mln

* New quarterly dividend of 2 cents/share

* Shares jump 13 pct (Adds share move, CEO comments, byline)

By Ritsuko Ando

NEW YORK, Jan 26 (Reuters) - Tellabs Inc TLAB.O shares jumped 13 percent on Tuesday after it reported a strong profit margin and gave an upbeat outlook for first-quarter sales, easing concerns about weak technology spending.

Tellabs, a supplier to major phone companies like AT&T Inc (T.N), Verizon Communications Inc (VZ.N) and Sprint Nextel Corp (S.N), forecast first-quarter revenue of $370 million, plus or minus 2 percent.

Analysts on average expected first-quarter revenue of $365 million, according to Thomson Reuters I/B/E/S.

The strong outlook overshadowed a decline in fourth-quarter revenue to $389 million from $408 million a year earlier. That was roughly unchanged from the third quarter and a touch lower than Wall Street's average forecast of $391 million.

Lawrence Harris, an analyst at CL King & Associates, said investors were also impressed by Tellabs' fourth-quarter gross profit margin of 45.3 percent, up from 41.6 percent a year earlier and the highest in more than three years.

Many analysts had forecast gross margin would be around 43 percent.

"Fourth-quarter revenue is slightly below our estimates, but gross margin was better than anticipated. That's contributing to a small upside surprise. The other factor is the guidance," Harris said.

Tellabs forecast more margin improvement in the current quarter.

"It's been a combination of two things. The first one is our relentless focus on cost reductions," Chief Executive Rob Pullen said.

"More importantly, it's from the product mix. We're selling less of our lower-margin products and more of our higher-margin products," he said, adding that the company was no more focused on its Ethernet and wireless products.

Companies like Tellabs, previously believed to be resilient to recession, were hit by a decline in telecommunications infrastructure spending over the past year.

Such equipment makers have responded by cutting costs and focusing on higher-margin products to improve profitability.

Tellabs said first-quarter profit rose to $62 million, or 16 cents a share, from $13 million, or 3 cents a share, a year earlier, helped by a $23 million tax benefit.

Excluding amortization, restructuring and tax charges but including stock-based compensation, its earnings would have been 8 cents a share, a penny higher than the average analyst estimate.

The company said it plans to cut 200 jobs, or around 5 percent to 6 percent of its current workforce, over the next five quarters, and reduce general and administrative expenses.

It also announced a new quarterly dividend of 2 cents a share and said it would continue its share repurchase program during 2010.

S&P Equity raised its rating on Tellabs shares to a "hold" from "sell." The stock rose 78 cents to $6.68 in late morning trading. (Reporting by Ritsuko Ando; Editing by Derek Caney and Maureen Bavdek)

FILED UNDER: