Tellabs Inc. (TLAB) declared third quarter 2010 financial results that exceeded the Zacks Consensus Estimate. Total revenue of $429.2 million was up 10.2% year over year.
Third quarter revenues were above the Zacks Consensus Estimate of $427 million. During the quarter, increased revenues in the Transport and Services segments offset lower revenues in the Broadband segment.
On a GAAP basis, net income in the reported quarter was $56.5 million or 15 cents per share compared with a net income of $29.3 million or 7 cents per share in the prior-year quarter. However, adjusted (excluding special items) earnings were 15 cents per share, a penny above the Zacks Consensus Estimate of 14 cents.
GAAP gross margin was 50.2% compared with 41.7% in the year-ago quarter. This reflects favorable product-mix for high-margin Data products. Operating expenses in the same quarter were $149.9 million compared with $137.2 million in the prior-year quarter.
The increase in operating expenses was mainly due to higher research and development as well as sales and marketing costs associated with the acquisition of WiChorus. Operating margin was 15.2% versus 6.4% in the year-ago quarter.
During the quarter, the company repurchased 15.6 million shares for a consideration of $111 million. Tellabs plans to continue returning capital to stockholders through dividends and share repurchases.During the third quarter, Tellabs also distributed $7.5 million to stockholders through a quarterly cash dividend.
During the first nine months of fiscal 2010, Tellabs generated $247.7 million cash from operations compared with $174 million in the year-ago quarter. Free cash flow in the first nine months of fiscal 2010 was $316.6 million compared with just $149.1 million in the prior-year period.
At the end of the third quarter of 2010, Tellabs had $1,169.9 million of cash & marketable securities on its balance sheet compared with $1,104.8 million at the end of fiscal 2009. The balance sheet of Tellabs had no outstanding debt.
Broadband Segment
Total revenue of the Broadband segment was $198.9 million, down 3.4% year over year. Within this segment, Data Product revenues were $110.7 million, up 35.2% over the year-ago quarter. Access revenues came at $58.0 million, down 32.6% over the prior-year quarter. Managed Access revenues were $30.2 million, down 20.3% year over year.
Broadband profit was $48.6 million, down 2.0% year over year. The slight decline in segment profit was due to lower managed access revenues and higher research and development spending for data products, which was almost entirely offset by higher data product revenues.
Transport Segment
Total revenue of the Transport segment was $169.8 million, up 32.8% year over year. However, this segment generated a profit of $71.4 million, up 147.9% year over year. This was mainly due to the higher level of revenues from digital cross connect systems.
Services Segment
Total revenue of the Services segment was $60.5 million, up 9.0% year over year. This segment generated a profit of $22.5 million, up 12.5% year over year. This was mainly driven by the higher overall revenue levels.
Geographic Distribution
In third quarter 2010, North America region generated $297.6 million of revenues versus $273.4 million in the year-ago quarter. Rest of the World generated the remaining $131.6 million versus $115.9 million in the prior-year quarter.
Portfolio Distribution
In third quarter 2010, Growth products generated $223.9 million of revenues, up 26.9% from $176.3 million in the year-ago quarter. Growth products now constitute 52% of total revenue. Core products generated the remaining $205.4 million.
Future Financial outlook by Management
Management expects fourth quarter fiscal 2010 revenues to be in the range of $410 million to $430 million, up from $389 million in the fourth quarter of fiscal 2009. Gross margin is expected to be 44%, plus or minus 1 or 2 points, depending on product mix.
Non-GAAP operating expenses are expected to be in the mid-to-high $140 million range. Stock-based compensation expenses will be approximately $6 million. Non-GAAP tax rate is expected to be about 32%.
Our Take
We believe, in the long run, a huge demand for high-speed mobile data and video services will result in rapid growth for mobile backhaul and optical transport products as smartphones are becoming the choice of the next-generation. Additionally, we believe the U.S. President’s endorsement of wireless spectrum hike plan will highly benefit Tellabs. On the other hand, our major concern is the growing competitive threat in the wireless backhaul industry.
Additionally, Tellabs is facing ongoing economic headwinds, which still persist in several parts of the world, especially the European regions. Tellabs also faces a high level of customer concentration. Three customers — AT&T, Verizon Wireless and Sprint-Nextel — account for more than 60% of its total revenue. Losing any of these customers would have a significant material impact on the company’s top line.
We maintain our long-term Neutral recommendation for Tellabs. Currently, it is Zacks #4 Rank (Sell) stock.
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