NEW YORK Network equipment maker Tellabs Inc TLAB.O reported lower-than-expected quarterly revenues and forecast sequentially flat sales for the current quarter, indicating a slow recovery for telecommunications spending.
While analysts said the results reflect weaker-than-expected spending by customers like Verizon Communications Inc (VZ.N), they also noted that Tellabs' profit margin had improved thanks to cost cuts and sales of more profitable broadband equipment.
Tellabs said third-quarter revenue fell 8.2 percent to $389 million, missing Wall Street's average forecast of $394 million, according to Thomson Reuters I/B/E/S. Earnings per share were in line.
Sales of fiber access equipment was particularly weak, which analysts said matched up with lower-than-expected growth numbers for Verizon's (VZ.N) FiOS television and Internet service.
"Access was especially weak with $86 million in sales, well below our $99 million forecast, led, we believe, by weaker FiOS net adds reported earlier today at Verizon," said Bank of America Merrill Lynch analyst Tal Liani.
Verizon added 198,000 net new FiOS Internet customers in the third quarter, compared with Bank of America Merrill Lynch's forecast for 287,000.
Tellabs shares fell 3 percent to $6.44 on Monday morning. They have risen around 35 percent over the past six months on hopes that an economic recovery would encourage phone companies to step up network investment.
FLAT REVENUE, HIGHER MARGIN AHEAD
For the fourth-quarter, Tellabs forecast revenue to be flat, plus or minus 3 percent, compared with the previous quarter.
Analysts, who had on average expected $399 million in sales for the fourth quarter, said that outlook appeared cautious considering an expected increase in network spending by AT&T.
Tellabs Chief Executive Officer Rob Pullen said the outlook took expectations for AT&T into consideration, but added that many of the company's customers were still cautious.
"I've got customers saying, 'Hey Rob, I have budget money, I'm going to spend,'" Pullen said on a conference call. "I have customers saying, 'I need to spend, but I don't know if I have budget money,' and I have customers saying, 'I think we're going to be cautious in the fourth quarter,' so it's a mix."
Despite the tepid outlook, analysts saw a bright sign in Tellabs' gross profit margin, which rose to 41.7 percent in the third quarter from 38.2 percent a year earlier.
The company forecast its margin in the current quarter on profit excluding items to rise to 43 percent, give or take 1 to 2 points. That was higher than the 41.9 percent forecast by J.P. Morgan analyst Rod Hall, who said that meant the bottom line could be in line or higher than he expected.
"Based on the revenue, gross margin and opex guidance provided, our preliminary calculations imply a fourth-quarter EPS range of $0.06 to $0.07 versus our current estimate of $0.06," he said.
Third-quarter net profit was $29 million, or 7 cents a share, compared with a year-earlier loss of $999 million, or $2.51 a share, that included a $988 million goodwill charge.
Excluding items such as amortization, restructuring and tax charges but including stock-based compensation, earnings were 6 cents a share and matched the average Wall Street forecast.
Tellabs announced last Thursday that it planned to buy wireless infrastructure gear manufacturer WiChorus for $165 million to bolster its next-generation wireless technology and take advantage of growing smartphone sales.
Analysts have said the move will help it compete better in the long-term against other equipment makers like Alcatel-Lucent ALUA.PA and Cisco Systems Inc (CSCO.O). Tellabs has said the deal would probably dent its profit in 2010, but add to earnings excluding special items from 2011.
(Reporting by Ritsuko Ando; Editing by Derek Caney and Lisa Von Ahn)