Tellabs sales disappoint, shares fall 20 percent

NEW YORK Tue Jan 25, 2011 11:58am EST

Related Topics

NEW YORK (Reuters) - Tellabs Inc TLAB.O warned that first-quarter sales would miss expectations after it posted disappointing fourth-quarter results, suggesting the network equipment maker is losing market share to rivals like Cisco Systems Inc (CSCO.O).

The company's shares fell 20 percent on Tuesday.

In the past year, the company benefited from a push by AT&T Inc (T.N) and other phone companies to build advanced wireless networks to support smartphones and other new devices.

But analysts have long speculated that Tellabs may be losing market share as AT&T upgrades its networks using equipment from competitors such as Cisco and Alcatel-Lucent (ALUA.PA).

Some said the shift may be happening more quickly than they expected, presenting a major hurdle for Tellabs because AT&T and Verizon Communications (VZ.N) account for about half of its revenue.

Those worries appeared to play out in the fourth quarter, with Tellabs reporting that revenue rose 5 percent to $410 million, but missed Wall Street's average forecast of $418.4 million.

"The numbers were quite a bit lower than we expected," said Morgan, Keegan & Co analyst Simon Leopold. "If we look back at the course of the middle of 2010, they lost significant business at AT&T. They are suffering. That chunk of business is not recovering."

The company posted an unexpected loss of $11 million, or 3 cents a share, compared with a profit of $62 million, or 16 cents a share, a year earlier.

"Obviously we're disappointed in our fourth-quarter results and our guidance for the first quarter," Chief Executive Rob Pullen said on a conference call.

Tellabs executives said that AT&T and Verizon made up about 53 percent of its customer base for much of 2010 -- but that fell to 41 percent by the fourth quarter.

The decline was largely due to less business from AT&T, executives said. When asked on the conference call whether that would change in the coming quarters, one executive said, "We hope so, but we're just going through the budget cycle with them right now, so we don't have great visibility yet."

Meanwhile, its drive for new business overseas is also hurting margins as it sacrifices initial profit for market share. The result was that gross profit margin declined to 38 percent -- or 42 percent excluding charges -- in the fourth quarter from 45.3 percent a year earlier.

Tellabs forecast gross margin to be between 38 percent and 42 percent in the first quarter.

First-quarter sales, meanwhile, should be $315 million to $335 million, the company said. That would be below the $402.7 million analysts polled by Thomson Reuters I/B/E/S had expected.

"A sequential drop in first-quarter revenue is normal -- but not 20 percent," said Morgan, Keegan's Leopold.

The fourth-quarter loss included a charge of $16.5 million from a canceled tender offer in India. Excluding some one-time items, Tellabs earned 2 cents per share.

The results drove investors out of the stock on Tuesday. Shares dropped $1.46 to $5.58 on the Nasdaq, wiping out roughly $550 million of its stock market value. Morgan Stanley analyst Ehud Gelblum downgraded the stock to "underweight."

Cisco's shares were up nearly 1 percent.

(Reporting by Paul Thomasch and Ritsuko Ando. Editing by Lisa Von Ahn, Derek Caney and Robert MacMillan)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.