July 27, 2009 / 11:32 AM / 11 years ago

UPDATE 5-Tellabs rev beats, but CEO avoids calling recovery

* Q2 revenue $385.4 mln vs Wall Street view $382.6 mln

* Sees Q3 rev “flat to up by mid-single-digit” vs Q2

* Sees Q3 margin around 40%, lower than analysts expected

* CEO sees stability but says too soon to predict recovery

* Shares down 1.4 percent (Adds analysts’ comments)

By Ritsuko Ando

NEW YORK, July 27 (Reuters) - Network equipment maker Tellabs Inc TLAB.O reported stronger-than-expected second-quarter revenue and forecast third-quarter revenue would likely be higher, but it gave a lower-than-expected margin outlook and said it was too early to predict an economic recovery.

Shares of Tellabs fell 1.4 percent on Monday afternoon to $5.69, as investors found few new reasons to buy the shares, which had already risen around 12 percent over the past three months, given the company’s cautious tone.

“Our business appears to be stabilizing,” Chief Executive Rob Pullen said, but he added: “I believe it’s probably too early right now to predict a recovery in the economy.”

“Customers can turn off and on their capex,” or capital spending, he replied when asked why he was being so cautious.

The company, which supplies gear to major phone operators such as AT&T Inc (T.N) and Verizon Communications Inc (VZ.N), forecast third-quarter revenue would be flat to up by a mid-single-digit percentage from the second quarter, adding that it would more likely be up than flat.

Tellabs, which competes with Alcatel-Lucent ALUA.PA, reported that its second-quarter revenue fell 11 percent to $385.4 million from a year earlier. The average analyst forecast was for revenue of $382.6 million, according to Reuters Estimates.

Second-quarter net profit fell to $15.7 million, or 4 cents a share, from $39.0 million, or 10 cents a share, a year earlier.

Profit including equity-based compensation but excluding other charges was 6 cents a share and in line with the average Wall Street estimate, according to Reuters Estimates.

Most analysts said the revenue outlook and results together were slightly better than they had expected, but not enough to bid up the shares.

MARGIN OUTLOOK WEAK

Some said they were slightly concerned with the weak margin outlook. The company forecast gross margin, excluding items, to be around 40 percent, plus or minus a point or two, in the third quarter.

Consolidated gross profit margin in the second quarter rose to 43.5 percent from 34.7 percent a year earlier, helped by cost cuts and a focus on more profitable segments. The company said margins should recover in the fourth quarter as it shifts to a more profitable mix of products.

“With gross margin guidance being below forecast, there’s certainly a concern that some of the revenue strength is coming from low-margin products,” said J.P. Morgan analyst Steven O’Brien. “But this should just be a temporary headwind.”

Aside from the weaker margin outlook, most analysts said the results matched or beat their expectations.

Robert W. Baird & Co. analyst Kenneth Muth maintained his “outperform” rating, citing growth in the company’s new technology segments and growing market share in advanced Internet protocol access products.

“We remain buyers of the stock as revenue mix from growth products is accelerating, business is stabilizing and Tellabs’ IP products are taking share, which positions the company for growth in 2010,” Muth said.

UBS analyst Nikos Theodosopoulos said he was maintaining a “buy” rating on the shares, and reiterated a $6.50 price target for the shares. (Reporting by Ritsuko Ando, editing by Gerald E. McCormick and Derek Caney)

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