More Vendor Souring Fears at Tellabs (TLAB, T, CSCO)

Tellabs Inc. (NASDAQ: TLAB) started to look like it was in worse trouble than a garden variety sell-off from an analyst downgrade last week.  There was no downgrade on mere valuation or hitting a price target.  It was on concerns that AT&T Inc.. (NYSE: T) was going to consolidate its vendors and move away from Tellabs.  The winner is believed to be Cisco Systems, Inc. (NASDAQ: CSCO), but this is appearing to be more of a loss for Tellabs’ stock than a win for Cisco stock.

On Friday, Tellabs’ shares were hit hard on a Barclays analyst downgrade where the price target was cut down to $7.00 from $9.50.  Their note: the belief that AT&T Inc. may be dropping much of its vendor business with Tellabs in a vendor consolidation move that could cost TLAB 5% to 10% of its revenues.  That knocked off 11% of the value with a $6.98 close on Friday versus a $9.00 close the previous Friday with a 52-week range of $4.96 to $9.45.  It also traded 4-times normal volume with more than 42 million shares traded.

Something was looking wrong, very wrong, on the charts during the Friday trading session.  This looked like research turning into add-on rumor trading.

And now today comes another analyst downgrade.  Morgan Stanley cut the rating down to equal-weight from overweight.  This cut was not on valuation nor price target achievement.  It was also based upon the belief that the communications services provider will lose some of its router business due to AT&T transitioning away over to Cisco’s more robust router.

Monday was a tough day with another drop to $6.81 on the market and tech stocks selling off.  Things have gone from bad to worse, and shares are down another 4.8% at $6.48 mid-day on only 11 million shares.

Revenue from customers within North America was 66% of Tellabs consolidated revenue in 2009, compared with 68% in 2008 and 74% in 2007. Revenue from customers outside North America was 34% of consolidated revenue in 2009, compared with 32% in 2008 and 26% in 2007.

From Tellabs’ 2009 Annual Report: “We had two customers in 2009 who contributed more than ten percent of our revenue. Revenue from Verizon (including Verizon Wireless) was 30% of consolidated revenue in 2009, compared with 33% in 2008 and 37% in 2007. Revenue from AT&T (including the former BellSouth and Cingular) was 21% of consolidated revenue in 2009 and 16% in 2008 and 2007. No other customer in 2009, 2008, or 2007 accounted for more than 10% of consolidated revenue.”….

As far as what is  said about AT&T in the Annual Report: “We supply AT&T and its affiliated companies products and services under several agreements, including agreements with companies acquired by AT&T. We provide the following products from our Transport segment: Tellabs 5500 Digital Cross Connect products and the Tellabs 7100 Optical Transport Systems. In the Broadband segment we provide AT&T with the Tellabs 1000 Multiservice Access Platform, Tellabs 1100 Multiservice Access Platform, the Tellabs 8600 Managed Edge System and the Tellabs 8800 Multiservice Router products. AT&T procures support services and professional services from our Services segment. These products and services are provided under various agreements. These supply agreements are with multiple AT&T entities and may include separate products and services or a combination of products and services. The supply agreements also may relate to products in one segment or across multiple segments of our business. These agreements have different expiration dates. The earliest expiration date is May 1, 2010, and the latest expiration date is March 18, 2014. All of these agreements can be extended by written agreement of the parties….. We evaluated the materiality of each of these contracts with AT&T and Verizon and have determined that currently none of these contracts with our principal customers is required to be filed as material contracts pursuant to Items 101(c)(1)(vii) and 601(b)(10) of Regulation S-K.”

So, what to expect? It would not be a shock if Tellabs reaffirms guidance for the coming quarter, at least in North America.  It appears as though this is all based upon belief that the business is disappearing or transitioning away, and Tellabs could always say that they still have orders and still have a strong relationship with AT&T.  The problem with the company defending itself is that the fears from the analysts are for what AT&T plans in the coming quarters rather than what it has on the books now.

The total drop from the first and second downgrade along with the overall market and technology sector has taken shares from $7.86 down to $6.48.  That is a drop of 17.5%.  Go back to the $9.00 mark from two Fridays ago, and shares are down 28%.

JON C. OGG