Investors might be willing to forgive Tellabs
Investors are less likely, however, to look favorably on the optical network supplier's proposed merger with Advanced Fiber Communications
Wall Street did slap the stock down 5% in trading yesterday, as Tellabs posted Q3 revenues of $284.3 million, compared with the $300.4 million that analysts expected. While the company managed a profit of $45.9 million -- a big improvement on the $64.8 million loss in the same quarter last year -- it was down from the $50 million profit in Q2.
Clearly, the Q3 revenue took Tellabs and Wall Street by surprise. CEO Krish Prabhu had forecast between $295 million and $305 million in revenues. What happened? Prabhu said that one of Tellabs' contract manufacturers relocated its operations, causing order disruptions that lowered the top line by about $12-15 million.
That seems like a perfectly understandable excuse for the revenue shortfall. And it also appears to explain the miss on earnings forecasts. A closer look at the numbers shows Tellabs steering clear of the pricing wars gripping much of telecom equipment sector. The company's margins are holding up quarter-on-quarter, and cash flow continues to improve. Investors should be relieved by the numbers.
Its acquisition plans, by contrast, should leave investors cold. Advanced Fiber Communications is fast losing its shine as a merger partner. For starters, AFC's latest quarterly earnings were a disappointment. The optical vendor has missed milestones on major contracts and incurred penalties for late product deliveries, running the risk of losing customers. Alcatel
All the same, the merger likely won't be nixed. Investors will complain that AFC will be dilutive, but Prabhu and his executive team really want the deal to go through. They reckon Tellabs is better off with AFC than going it alone. How will investors react to this increasingly misguided deal? It looks like we will soon find out.
Fool contributor Ben McClure hails from the Great White North. Ben doesn't own shares of any company mentioned here.
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