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Shares of Tellabs (Nasdaq: TLAB ) got a serious haircut this morning, removing two months of steady advances. The trigger event was a third-quarter business report, showing sales gaining 10% year over year to $429 million while GAAP earnings more than doubled to $0.15 per share. If that doesn't sound like a disaster, you're absolutely right. The obvious bad news comes from fourth-quarter guidance, where sales growth will stall and margins should take a serious fall.
Last quarter, Tellabs impressed me with its broad-based customer list and what looked like the beginnings of a turnaround story under way. But fighting Cisco Systems (Nasdaq: CSCO ) and Juniper Networks (Nasdaq: JNPR ) for table scraps when AT&T (NYSE: T ) and Verizon (NYSE: VZ ) build out their high-speed wireless networks turns out to be an unpredictable business, and things simply aren't working out in Tellabs' favor.
One indication of this negative trend shows up in the inventory trends, where Tellabs is building up a substantial overhang in the "finished goods" category without showing a similar commitment to higher volume in the work in progress category. That, combined with the distressed gross margins coming up ahead, tells me that Tellabs has to resort to discounted pricing in order to win new contracts, keeping more profitable systems out of the mix and generating less cash from the sales that do get signed.
I don't envy Tellabs' executives the task of figuring out how to reverse these trends. The easy way out of low sales goes through deeper discounts, but you've already seen where that road leads. This should be an exciting growth phase in the history of selling telecommunications infrastructure equipment, but Tellabs is missing the party. Optical networking specialist Infinera (Nasdaq: INFN ) looks like a bargain after a recent drop, but Tellabs just looks like a mess.