By: mikeb
Reply To: None Thursday, 10 Jun 1999 at 12:16 AM EDT
Post # of 109
H&Q Report on TLAB
-mikeb
**** Hambrecht & Quist ****
Company: Tellabs
Price: 60.94
Recommendation: Buy - Focus List
Date: 6/10/99
Fundamentals Strong - Adding to FOCUS LIST
As a result of conversations with Tellabs management at the Supercomm trade show, we believe that the company's near-term fundamentals are exceedingly strong and that the company has visibility into the next several quarters. These results should be driven by robust sales of the Titan digital cross-connect, the company's flagship product line. We also believe that the company has the opportunity to be a beneficiary of AT&T's cable telephony spending. We are placing BUY rated Tellabs on our FOCUS LIST.
Titan - exceedingly strong quarter
As a result of conversations with Tellabs management at Supercomm, we believe that the company's flagship product, the Titan cross connect, should post exceedingly strong results in the second quarter. While Titan business is robust across the board, we believe that the biggest incremental change in the second quarter was the rapid rate at which Teleport has become a buyer of the Titan. We believe that the company has several quarters worth of visibility in this product line due to a very diverse customer base. As a result, we believe that there could be upside to our Titan revenue estimate for the quarter, of $265 million, and for 1999 estimate of $1.1 billion. As well as upside to our second quarter EPS estimate of $0.29 and our 1999 estimate of $1.25.
Cablespan - opportunity at AT&T
Recent conversations with Tellabs management lead us to believe that Tellabs Cablespan product, a cable telephony platform, could be a beneficiary of AT&T's spending on upgrading its cable plant for telephony both in what was the old TCI plant as well as other cable properties. While the Cablespan's largest current customer is A2000 Cable Television & Telecommunications (Europe), Tellabs does sell the Cablespan to AT&T's pending cable acquisition, MediaOne. We believe that there could be upside to our 1999 estimate of $70 million for the Cablespan product. We would note that this estimate does not include any meaningful revenue contribution from AT&T. Additionally, we would pointout that we believe that margins on the Cablespan product are currently significantly below the corporate average of 59%, but we would expect this to improve over time.
Martis sales robust, despite projected foreign exchange loss
We believe that Martis should also post a strong quarter, we currently believe that results should be inline with our $105 million estimate. However, this does not take into account our assumption of foreign currency exchange rate losses of approximately $10 million in the quarter. Had their been no foreign exchange loss the results would be even been stronger. Our calendar 1999 estimate for the Martis product is $500 million, a year-over-year growth of 23%.
Adding Tellabs to the FOCUS LIST
We are adding BUY rated Tellabs to our FOCUS LIST as a result of what we believe are very strong near-term fundamentals. We believe that there could be upside to our Titan product line estimate of $265 million as a result of increasing sales to Teleport. The company's also has the potential to benefit from AT&T's cable plant upgrade for telephony through its Cablespan product. We also believe that the company's DSO should continue to come down from the 73 days in the first quarter. Overall, while we are maintaining our estimates, we believe that there could be upside to both our second quarter EPS estimate of $0.29 and our 1999 estimate of $1.25. Our near-term price target is $72 based on a 45x multiple to our CY00 EPS estimate of $1.60
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