Zacks_Analysts' Blog : Tellabs Wins OTS Contract - Analyst Blog

Tellabs Inc. (TLAB) was recently awarded a big contract to supply its 7100 Nano Optical Transport System (OTS) for the nationwide deployment of fiber optic network of the French broadband internet service provider (ISP) CELESTE. The ISP is at present in the process of installing a 4,000 kilometers long fiber optic network in France. Tellabs 7100 Nano OTS will enable CELESTE to offer more bandwidth-prone services in a cost effective manner. Tellabs claims its 7100 OTS platform is capable of reducing service provider’s capital expenditures by 65% and operating expenses by nearly 85%.

Although the financial terms of the contract are not known, we believe order from CELESTE will boost Tellabs since the company is currently facing serious problems in its core wireless backhaul solutions segment. AT&T (T) was its major customer for its 8800 multi-service router. However, AT&T decided to upgrade its network with pure Ethernet solutions since the company is moving toward deploying 4G LTE networks. As a result, AT&T is now using Ethernet routers of Cisco Systems Inc. (CSCO) and Alcatel-Lucent (ALU) instead of Tellabs.

Tellabs has given a pathetic financial outlook for the second quarter of 2011. Revenue guidance was below the consensus estimates and gross margin guidance is a pathetic 38%, a significant fall from 53.5% in the prior-year quarter. Total revenue is expected to decline by around 21% year over year, which indicates that the continuous decline in sales of Tellabs’ legacy products, its newly launched growth products, may start facing a stiff competition.

The optical networking solutions of Tellabs enable the carriers to meet the growing demand for bandwidth for metro-Ethernet networks. Besides the traditional telecom carriers, Tellabs is expanding its market share among Multi-service operators (MSO), particularly within the cable TV segment. The company already received orders for its 7100 and 7300 systems from two major cable TV operators.