January 26, 2005
Sure, Tellabs' (Nasdaq: TLAB ) fourth-quarter results met Wall Street's earnings targets. But so what? Cost cutting and a less-than-bullish outlook leave investors little to get excited about in the telecom equipment maker.
Tellabs lost $139 million, or $0.32 per share, compared with a loss of $23 million in Q4 2003. Revenue rose to $379 million from $279 million a year ago. The top line got a nice lift from $53 million worth of revenue from one month's operation of its recent acquisition, Advanced Fibre Communications.
Stripping away the cost associated with the acquisition and a $47 million writedown from its 2002 purchase of Ocular Networks, Tellabs' profit was $41 million -- lo and behold, spot on the number analysts were looking for.
Thanks to this little thing called competition, next year's prospects offer little inspiration. In its conference call yesterday, Tellabs said that 2005 gross margins could fall to 45% from margins of near 55%. That's not what investors want to hear.
To offset margin pressure and help absorb the cost of recent acquisitions, Tellabs will be forced to cut costs. Tellabs already plans to cut a total of 110 jobs in the U.S. and has been quickly restructuring its international operations as it eliminates as many as 210 jobs in Europe.
Tellabs is trading at 21 times 2005 earnings. That doesn't sound overly pricey. But what's the bottom line for investors? Having to slug it out with Lucent (NYSE: LU ) and Nortel (NYSE: NT ) while cutting costs will likely put a damper on things. It's hard to make out much pop or sizzle coming from Tellabs' stock anytime soon.
Tellabs management, if you are listening, here's something that could lift investors' spirits: a share buyback. Tellabs has $1.1 billion worth of cash and liquid securities sitting on its balance sheet. Investors would be far more tolerant of the company's lackluster outlook if they were returned some of that cash pile. At the very least, a buyback might force Tellabs to forget about acquisitions and focus on growing the business the hard way.
Fool contributor Ben McClure doesn't own shares of any companies mentioned in this article.