Tellabs Inc. (TLAB) declared disappointing first-quarter 2012 financial results, missing the Zacks Consensus Estimates yet again. Quarterly total revenue of $257.9 million was down 20% year over year, and well below the Zacks Consensus Estimate of $277 million. All the three reporting segments of Tellabs witnessed sales reductions.

On a GAAP basis, net loss in the first quarter of 2012 was $139.8 million or a loss of 38 cent per share compared with a net loss of $24.1 million or 7 cents per share in the prior-year quarter. Adjusted (excluding special items) EPS in the reported quarter was a loss of 6 cents, significantly higher than the Zacks Consensus Estimate of a loss of 3 cents.

GAAP gross margin was 37.1% compared with 37.9% in the year-ago quarter. Operating expenses, in the reported quarter, were $232.6 million compared with $254.9 million in the prior-year quarter. Operating margin in the first quarter of 2012 operating margin was a negative 53.1% compared with a negative 10.1% in the year-ago quarter.

During the first quarter of 2012, Tellabs consumed $37.5 million of cash for operations compared with a negative $81.5 million in the prior-year quarter. Free cash flow, in the reported quarter was a negative $42.5 million compared with a negative $91.9 million in the prior-year quarter. At the end of the first quarter of 2012, Tellabs had $934 million of cash & marketable securities on its balance sheet compared with $976.6 million at the end of 2011. Tellabs’ balance sheet had no outstanding debt.

Broadband Segment

Total revenue of the Broadband segment was $130.1 million, down 24.8% year over year. Within this segment, Data Product revenue was $55.1 million, down 48.3% over the year-ago quarter. Access revenue was $35.9 million, down 10.5% over the prior-year quarter. Managed Access revenue was $39.1 million, up 48.1% year over year.

Broadband segment profit was $8 million compared with $19.7 million in the year-ago quarter. The huge decline in segment profit was driven by lower level of overall Broadband segment revenue.

Transport Segment

Total revenue of the Transport segment was $79.6 million, down 19.9% year over year. Decline in revenue resulted from lower sales of digital cross-connect products and optical transport systems. The segment generated a profit of $8.2 million, down 48.8% year over year. This was mainly due to lower revenue from high-margin digital cross-connects.

Services Segment

Total revenue of the Services segment was $48.2 million, down 3.6% year over year. Decline in revenue was attributable to lower deployment services revenue in North America. The segment generated a profit of $15.2 million, up 52% year over year, mainly due to lower level of services costs.

Geographic Distribution

In the first quarter of 2012, North America region generated $126.6 million (49% of total revenue) of revenue compared with $175.1 million in the prior-year quarter. The rest of the World generated the remaining $131.3 million (51% of total revenue) of revenue compared with $147.3 million in the prior-year quarter.

Portfolio Distribution

In the first quarter of 2012, Growth products generated $147 million of revenue compared with 194.4 million in the prior-year quarter. Growth products now constitute 57% of total revenue. Core products generated the remaining $110.9 million compared with $128 million in the prior-year quarter.

Future Financial Outlook

Management expects its second-quarter 2012 revenue to be in the range of $280 million to $305 million. Non-GAAP gross margin is expected to be 40%, plus or minus 1 or 2 percentage points, depending on product mix. Non-GAAP operating expenses are expected to be in the mid $100 million range.

Recommendation

Our major concern for Tellabs is the increasing competition in its core wireless backhaul solutions segment. The company already lost significant amount of business from its most important customer AT&T Inc. (T). Currently, we maintain a long-term Underperform recommendation on Tellabs. The company also holds a short-term Zacks #5 Rank (Strong Sell).

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