Tellabs Soars on a Convincing Beat and Raise

Telecom network equipment maker Tellabs (TLAB) is enjoying the benefits of a solid quarterly report on Tuesday morning. Shares surged as high as $9.16 per share, more than 11% on heavy volume, but have come off of those 30-month highs following the news of S&P’s downgrades of both Portugal’s and Greece’s sovereign debt. The company reported net income of $45.9 million or 12 cents per share, compared to profit in the year ago period of $6.5 million or just 2 cents per share. After adjusting for one-time events, the company reported EPS of 11 cents which beat consensus estimates by 22%. Tellabs also posted sales growth of 5% to $379.7 million, as increased revenue from Broadband and Services segments allowed them to top expectations. In the quarter, product revenue increased 3.6% but services revenues were boosted 13%, although from a smaller base.

Perhaps most importantly, the sales outlook exceeded even the most bullish of Wall Street analysts for the quarter ahead. Management expects second quarter revenue to grow 10% to 12% compared with the first quarter, which implies a range of $417.7 million to $425.3 million. This projection leaves analyst’s expectations of $388 million seeming lackluster in comparison, and the most bullish estimate of $402.7 mln does not even come close. CEO Rob Pullen said more than half of last quarter’s sales came from its newest “growth” products and that phone companies are spending more on their wireless networks, which sheds a positive light on the future for this firm that was expected to grow sales only a slight 2.4% in fiscal 2010.

Profit margins rose to 50.7% in the first quarter easily topping expectations thanks to cost cutting, up from 44.2% in the same period a year ago. Management expects margin will stay around the same level in the second quarter. It said that expenses are expected to rise next quarter, but at a slower rate than revenue. For the full year, Tellabs sees gross margin in the upper 40s.

Tellabs is clearly benefiting from the increased network demands on wireless carriers as smartphones continue to sop up bandwidth. Tellabs CEO was pleased to discuss the company’s long term focus on the mobile backhaul has really begun to pay off. At Ockham, we think the business of helping wireless carriers manage their networks more efficiently is a winner with the quick adoption of smartphones, tablet computers, eReaders, and also remote wireless broadband connection cards for computers.

Tellabs has been one of the best performing NASDAQ stocks year-to-date (up more than 56%), and now trades at a forward looking P/E multiple of about 26x. So, this stock is clearly not as cheap as it was a short time ago, but the fundamentals are improving quickly and we expect analysts to start bumping up earnings and price targets soon following this quarterly report. We currently have the stock rated Fairly Valued or neutral after its recent run-up, but we do believe the stock has plenty of upside potential for a long term investor.

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