The Zacks Analyst Blog Highlights: SAP AG, Microsoft Corporation, Oracle Corporation, Tellabs and AT&T

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Jul 27, 2011, 09:30 ET

CHICAGO, July 27, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include SAP AG (NYSE: SAP), Microsoft Corporation (Nasdaq: MSFT), Oracle Corporation (Nasdaq: ORCL), Tellabs Inc. (Nasdaq: TLAB) and AT&T (NYSE: T).

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Here are highlights from Tuesday's Analyst Blog:

Earnings Preview: SAP AG

SAP AG (NYSE: SAP) is scheduled to announce its second quarter earnings before the opening bell on July 27, 2011. The current Zacks Consensus Estimates for the quarter is earnings of 79 cents a share. For the quarter under review, revenue is expected at $4.7 billion, according to the Zacks Consensus Estimate.

First-Quarter 2011, Summary

SAP AG reported first quarter 2011 earnings per share from continuing operations of €0.34 (46 cents) which were below the Zacks Consensus Estimate of 65 cents. Total revenues were €3.02 billion ($4.12 billion) below the Zacks Consensus Estimate of $4.17 billion.

Software revenue was €583 million, an increase of 26% year over year. Software and software-related service revenue was €2.33 billion, an increase of 20%.

Second-Quarter 2011 Zacks Consensus

The analysts covered by Zacks expect SAP AG to post second-quarter 2011 earnings of 79 cents a share, which is higher than 60 cents delivered in the prior-year quarter. The current Zacks Consensus Estimate ranges between earnings of 67 cents to 83 cents a share.

Zacks Agreement & Magnitude

Of the 20 analysts following the stock, one analyst revised his estimates upward while 2 analysts lowered their estimates in the last 30 days. However, the Zacks Consensus Estimate remained unchanged.

Positive Earnings Surprise History

With respect to earnings surprises, SAP AG has topped the Zacks Consensus Estimate twice in the last four quarters in the range of approximately 3.5% to 6.0%. The average remained at approximately 1.6%. This suggests that SAP AG has beaten the Zacks Consensus Estimate by an average of 1.6% in the trailing four quarters.

Our View

SAP AG is the leader in the worldwide enterprise applications market with the largest market share. Its primary focus is on high-margin software license sales. The company delivered a good first quarter 2011 with revenue increasing at a double-digit rate and gross margin expanding by 90 basis points (bps) year over year.

All regions enjoyed growth, with particular strength in the United States and emerging markets in Asia, Europe and Latin America. However, the company believes the economic environment still merits caution. Specifically, the market in Japan remains difficult due to the overall flat economic environment and a struggling export industry, caused partly by the strong yen.

SAP AG primarily competes with Microsoft Corporation (Nasdaq: MSFT) and Oracle Corporation (Nasdaq: ORCL) and currently holds a Zacks #3 Rank, which implies a short-term Hold rating.

Tellabs Woes Continue, Outlook Weak

Tellabs Inc. (Nasdaq: TLAB) declared its second quarter of 2011 financial results today, lagging behind the Zacks Consensus Estimates. Total revenue of $334.2 million was down 21% year over year, below the Zacks Consensus Estimate of $339 million. Although international revenue increased, lower revenue from North America is the primary reason for this poor performance.

On a GAAP basis, net loss in the second quarter of 2011 was $20.1 million or a loss of 6 cents per share compared with a net income of $64.1 million or an income of 16 cents per share in the prior-year quarter. Adjusted (excluding special items) EPS in the reported quarter was a loss of 3 cents, which just met the Zacks Consensus Estimate.

GAAP gross margin was 37.4% compared with 53.5% in the year-ago quarter. Massive decline in gross margin was mainly attributable to higher cost of revenue for Product segment.

Operating expenses, in the reported quarter, were $150.4 million compared with $146.9 million in the prior-year quarter. However, the second quarter of 2011 operating margin was a negative 7.6% compared with 18.8% in the year-ago quarter.

During the reported quarter, Tellabs also distributed approximately $7.3 million to stockholders through quarterly cash dividend. Management has decided to reduce costs by $50 million in the next year through a retrenchment of 330 jobs.

During the first half of 2011, Tellabs consumed $53.3 million in cash for operations compared with a cash generation of $165.9 million in the year-ago quarter. Free cash flow in the reported period was a negative $85.4 million compared with $151.8 million in the prior-year period.

At the end of the second quarter of 2011, Tellabs had $1,058 million of cash & marketable securities on its balance sheet compared with $1,134.5 million at the end of fiscal 2010. Balance sheet of Tellabs had no outstanding debt.

Future Financial Outlook

Management expects its third quarter of 2011 revenue to be in the range of $325 million to $345 million. Non-GAAP gross margin is expected to be 39%, plus or minus 1 or 2 percentage points, depending on product mix. Non-GAAP operating expenses are expected to be in the mid $130 million range.

Recommendation

Our major concern for Tellabs is the increasing competition in its core wireless backhaul solutions segment. Tellabs already lost significant amount of business from its most important customer AT&T (NYSE: T). We maintain a long-term Neutral recommendation for Tellabs. Currently, it has a short-term Zacks #3 Rank (Hold) on the stock.

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