Future Outlook is bright for Tellabs Inc. (TLAB). The recent earning revision trend is extremely favorable for the company. Ever since Tellabs declared its second quarter 2010 financial results on July 27, almost all the analysts covering the stock have made upward revision of their estimates.
This significant positive sentiment came from huge growth of Tellabs’ new technology products popularly known as “Growth” products that help the company to stabilize its overall businesses.
Second Quarter Highlights
Tellabs generated excellent top-line growth supported by a massive surge of wireless data traffic that forced the wireless operators to continuously upgrade their networks. Second quarter earnings beat the Zacks Consensus Estimate by 5 cents and revenues also exceed by 2.1%. The rise in year-over-year revenues is the result of higher sales for all the segments; Broadband, Transport and Services.
Quarterly gross margin was 53.5% compared with 43.5% in the year-ago quarter. This reflects favorable product-mix toward high-margin Data products. Data Product revenues were $158.7 million, up 48.9% over the year-ago quarter.
Growth products now constitute 58% of total revenue. Tellabs expects growth products to account for more than half of the total revenue in fiscal 2010 that prompted the company to predict more than 10% sequential growth of its top line in the future reporting quarters.
Agreements of Analysts
Of the 14 analysts covering the stock, in the last 30 days, 11 of them upwardly revised their estimates for both the ensuing third quarter and the following quarter. Furthermore, 13 and 10 analysts raised their estimates for full fiscal 2010 and 2011, respectively, during the same time period. What is important is that none of the analysts has made any negative estimate revision either for any quarter or any fiscal year during the same period.
It seems that most of the analysts are convinced regarding the growth prospects of Tellabs’ next-generation advanced IP-access (growth) products. Management has decided to substantially focus on the growth areas of mobile backhaul solutions, optical networking solutions and business services solutions. Massive demand for mobile Internet and video will persist in the long-run since smartphones are quickly taking over market share from basic mobile handsets.
We believe Tellabs will immensely benefit by the wireless broadband thrust of the U.S. government. Recently, U.S. President has endorsed a wireless spectrum hike plan proposed by FCC. The National Broadband Plan is mainly aiming to provide affordable wireless broadband services in the untapped rural markets. Several Tellabs products already received Rural Utilities Service acceptance certificates.
Currently, the Zacks Consensus EPS Estimate for the third quarter is 14 cents. If that materializes it would result in a substantial growth of 50% year over year. Similarly, for fiscal 2010, the current Zacks Consensus EPS Estimate of 55 cents is indicating a whopping gain of nearly 103.2% year over year.
Magnitude of Estimate Revisions
In synergy with the strong upward estimate revision trend, the Zacks Consensus Estimate has moved up by 4 cents, in the last 30 days, for the ensuing third quarter and the following quarter. Accordingly, for fiscal 2010, the Zacks Consensus Estimate moved up by 11 cents in the last 30 days and for fiscal 2011 Zacks Consensus Estimate, it also moved up by 8 cents.
We believe Tellabs is in a position to benefit over time, as large carriers have started implementing next-generation high-speed networks that require advanced IP access and data transport system. Successful integration of SmartCore platform may further generate long-run growth opportunity for the company as mobile data traffic is expected to grow 30%-50% a year for the foreseeable future. The company has sufficient liquidity, which will enable Tellabs to sustain temporal changes in demand by its customers.
Despite the above positives, some near-term concerns also remain. Tellabs may not be able to maintain its current business rate with its largest customer AT&T (T). If this comes true, then it will have serious consequences on Tellabs’ overall financials. Historically AT&T generated 20%-21% of Tallabs’ total revenue and accounted for nearly 40% of the company’s sales of the broadband-data networking products.
We thus maintain our long-term Neutral recommendation for Tellbs. Currently, it is a Zacks #3 Rank (Hold) stock.