We reiterate our long-term Neutral recommendation for Tellabs Inc. (TLAB), which means the stock will perform mostly in line with the broader market. Tellabs’ next-generation advanced IP-access products are receiving increasing market traction. Huge demand for high-speed mobile data and video services has resulted in rapid growth for mobile backhaul and optical transport products. This trend is likely to continue in the long-run as smartphones are becoming the next-generation choice.
Management has decided to substantially focus on the growth areas of mobile backhaul solutions, optical networking solutions, and business services solutions. Mobile backhaul solutions will support massive demand for high-speed mobile Internet and video and will enable telecom customers a smooth transition to 3G or next-generation 4G networks.
Optical networking solutions will enable the carriers to meet the growing demand for bandwidth for metro-Ethernet networks. Business services solutions, on the other hand, will serve large enterprises that need reliable multimedia services.
Tellabs will immensely benefit from the wireless broadband thrust of the U.S. government. The 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. Tellabs’ 7100 OTS and 7100 Nano OTS have received RUS (Rural Utilities Service) acceptance certificates. Tellabs1000 and 1100 Multi- service Access Series and Tellabs 8800 Multi-service Router earlier received RUS Certifications.
On the other hand, our major concern is the growing competitive threat in the wireless backhaul industry. Tellabs may not be able to maintain its current business growth rate with its most important customer AT&T (T). If this becomes a reality, 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 its broadband-data networking products sales. In the first half of 2010, Data Product revenue was $289.6 million, constituting more than 36% of its total revenue.