Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=41269
Story Retrieval Date: 5/25/2013 6:51:49 AM CST
Tellabs Inc., a Naperville, Ill.-based developer of telecommunications networking products, reported a 44.7 percent decrease in second-quarter net income, in line with expectations, due to diminishing product revenues.
Despite the plunge in earnings, talk of Nokia Siemens Network’s interest in acquiring Tellabs for $7 billion, or $16 to $17 per share, helped to buoy the company’s stock.
“From a strategic perspective, we believe an acquisition of Tellabs by NSN makes a lot of sense,” said John Slack, an analyst at Morningstar Inc. in Chicago. “As a niche vendor, Tellabs has a harder time competing head to head against newly merged industry behemoths.”
However, Simon Leopold of New York’s Morgan Keegan & Co. Inc. says the acquisition is unlikely to take place.
“I think Tellabs would offer good exposure to the North American market,” he said. “It’s about a $1.5-billion opportunity to have [that] exposure. However, I think Nokia Siemens desires more growth in portfolio products and would essentially be buying customer relationships from Tellabs, [which] has an outstanding relationship with Verizon.”
Both Leopold and Slack questioned the rumored acquisition price, which would be more than 50 times 2007 earnings and about three times sales.
Net income for the quarter ended June 29 fell to $29.6 million, or 7 cents per diluted share, from $53.5 million, or 12 cents per diluted share, a year ago. The results were slightly better than the average 6 cents per share that analysts on Yahoo Finance had forecast.
Revenues fell 2.7 percent in the quarter to $534.5 million compared with $549.3 million in the year-ago period, as product revenue, which accounts for most of the company’s sales, fell 6.3 percent.
Tellabs attributed the drop in overall product revenue to reduced business with a major customer and weaker sales in copper-based access platforms. Revenue from the launch of a new product in the company’s transport segment helped to offset the negative effects of these factors.
Analysts were not surprised at the significant decline in Tellabs’ second-quarter performance due to increasingly intense competition in the telecommunications industry.
“For several years now, we have been arguing that there are simply too many telecom equipment vendors chasing the handful of major network builds,” Slack said. “Aggressive pricing action by competing vendors has placed constant downward pressure on profit margins.”
In the past few years, companies like Tellabs have experienced increasing revenue concentration as telecom carriers have merged. With its sales depending on a small number of large customers, Tellabs faces great risk if any of its clients reduces product demand, Slack said.
The company said it expects third-quarter revenues of about $500 million. Analysts surveyed on Yahoo Finance are more optimistic, with an average estimate of $505.8 million in revenues.
For the first six months of the year, Tellabs’s earnings plummeted nearly 50 percent to $55.1 million, or 12 cents per diluted share, from $105.9 million, or 23 cents per diluted share, a year ago. Sales fell 7.3 percent to $986.5 million from $1.1 billion in the first two quarters of 2006.
Shares of company were up 33 cents, or 2.7 percent, to $12.53 at the close of trading Tuesday.