Tellabs (TLAB) Upgraded to Neutral

We have upgraded our recommendation on Tellabs Inc. (TLAB) to Neutral based on its current valuation. The stock price declined more than 44% in the last year and is currently trading at the low-end of the 52-week price range. We believe this low valuation level may cushion a further slide in the stock price.

Tellabs’ woes continue as the company posted weak financial results for the second quarter of 2011 and also provided a tepid outlook for the ensuing third quarter. Its globally reputed high-margin digital cross-connect products are still showing a downtrend. Furthermore, the company is facing serious problems with its key customer AT&T (T), which generated 35% of total revenues in 2010.

Nevertheless, Tellabs is aggressively targeting the mobile Internet market since its legacy switching products are gradually losing relevance. Management has also taken a restructuring measure in order to improve the bottom-line.

Management has decided to substantially focus on the growth areas of mobile backhaul solutions, optical networking solutions, and business services solutions. Mobile backhaul solutions support massive demand for high-speed mobile Internet and video and will enable telecom customers to undergo a smooth transition to 3G or next-generation 4G networks.

Optical networking solutions allow carriers to meet the growing demand for bandwidth for metro-Ethernet networks. Business services solutions, on the other hand, serve large enterprises that need reliable multimedia services.

We believe the acquisition of WiChorus will be incrementally positive for Tellabs’ growth in the long term. WiChorus’ state-of-the-art SmartCore 9100 platform is a leading mobile packet core solution that has been developed for next-generation (4G) LTE technology. it will also support the 3G networks. Integration of SmartCore with Tellabs’ existing IP mobile backhaul solution and intelligent network manager will create a formidable player in the industry.

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