Tellabs' ( TLAB) shortfall tells investors that telcos' 3G spending trends are trouble for some tech titans.
Shares of the Naperville, Ill., phone system supplier dropped 4% Friday after the company warned late Thursday that third quarter sales fell about 10% short of plan and profits would be less than half of what Wall Street expected. Tellabs blamed weak sales to U.S. wireless operators for its problems. Observers noted that a similar excuse was used recently by other old-line player Alcatel Lucent ( ALU). Both companies supply the four top wireless telcos AT&T ( T): Verizon ( VZ), Sprint Nextel ( S) and Deutsche Telekom's ( DT) T-Mobile. Some analysts say the spoiler of Tellabs' third quarter numbers is likely Sprint, the No. 3 wireless shop, which has somehow managed to run aground with CEO Gary Forsee at the helm. Sprint has launched a replacement search prodded by activist Ralph Whitworth of Relational Investors, according to reports. But larger forces may also be influencing the cash flow. AT&T, Verizon and Sprint are running toward the end of their so-called third generation, or 3G, network upgrades. T-Mobile is expected to start its effort next year. Industry watchers and analysts say equipment suppliers, especially those providing basic building-block networking gear to wireless companies, might be reaching the end of a selling cycle. Jefferies & Co. analyst George Notter suspects that demand for Tellabs' 5500 digital switching system may be on the wane. "The 5500 business is simply tailing off as wireless operators are now getting past the bulk of their 3G network investments," Notter writes in a research note Friday. If the trend continues, the next hardware peddlers to feel the pinch would likely be No. 1 wireless gearmaker Ericsson ( ERIC) and NortelNortel ( NT), say observers. Ericsson may have enough global scope to safely sidestep U.S. spending woes. Nortel supplies wireless gear to Verizon for network upgrades in smaller U.S. cities -- as Notter points out, and so far the Canadian telecom giant says it has not seen any slack in orders. The decline in 3G spending isn't necessarily meaningful for other suppliers, however. Optical networking shop Ciena ( CIEN) said Tuesday that its role as a tech specialist helps it avoid some of the pressures its larger rivals are feeling. And Internet gearmakers like Cisco ( CSCO) and Juniper ( JNPR) share a focus on selling routers for managing data traffic, an area where expansion efforts remain robust, say analysts.