Fewer Orders Drag Down Tellabs Profits

A weakening economy and fewer housing starts pushed Tellabs Inc.’s profit down 35 percent in the first quarter, while iffy second-quarter projections sent the company’s stock tumbling.

The Naperville, Ill.-based equipment maker on Tuesday said it earned $16.6 million, or 4 cents per share, in the first quarter of 2008, compared to $25.5 million, or 6 cents per share, a year earlier. Sales, on the other hand, were up 3 percent – from $452 million to $464 million.

But a gloomy forecast for the current quarter shook investors’ confidence as Rob Pullen, Tellabs’ new president and CEO, warned of sequential decline for the high-margin Tellabs 5500 series.

Tellabs competes against Alcatel-Lucent, Ericsson and Nortel Networks for business from global carriers, and the fight is growing fiercer. As providers consolidate, they pressure suppliers such as Tellabs to lower prices at slimmer margins. Plus, those operators are installing next-generation gear, while many of the major vendors are just now getting past legacy networking equipment.

Those factors all contribute to the “headwinds” that Pullen said will contribute to revenue between $425 and $445 million in the second quarter – numbers UBS  analyst Nikos Theodosopoulos called “disappointing” in a memo to clients.

Tellabs stock dove 67 cents, to $5.34, on the news.

Indeed, Tellabs sold a smaller number of 5500 digital cross-connects in the first quarter as the economy and housing starts slowed, and as AT&T Inc., a major customer, reduced FTTC spending.

Because of that, Tellabs’ transport segment profit fell to $79.2 million, or 28.6 percent, from $110.9 million in the first quarter of 2007. The transport division shipped fewer 5500 systems and more 7100 optical units. And while executives anticipate 5500 revenue to pick up in the second quarter, Tellabs will sell more 7100 series ONTs overall; those command “slightly above break-even margins,” said Tim Wiggins, executive vice president and CFO.

There are some bright spots for Tellabs, though. Despite the downbeat second-quarter estimates, Pullen said mobile backhaul will explode and that he will “focus on profitability” for that segment. Wireless carriers’ capex spend will rise only slightly, he said, but data applications are booming, causing backhaul pressure, and “that’s good for us.” The 8600 and 8800 series will be the best sellers for those orders, he said.

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