Calling the fourth quarter of 2006 a “tough” one for the company, Tellabs said the first quarter may be no easier.

Tellabs reported $455 million in revenue for the fourth quarter of 2006--the bottom of the range the company projected when it warned of lower than expected quarterly revenue earlier this month.

And the company expects revenue to stay flat sequentially or decline slightly in this year’s first quarter. “The first quarter of 2007 will look a lot like the quarter that just ended,” said Tim Wiggins, Tellabs’ chief financial officer.

In a note issued this morning, UBS Investment Research called that projection “disappointing.”

As the company has indicated, fourth-quarter sales were affected by pauses in spending from AT&T, BellSouth and Cingular Wireless as those companies sought to close their pending merger. Sales were also impacted by deferred revenue associated with Tellabs’ reconfigurable optical add/drop multiplexer (ROADM), the 7100, which Tellabs began shipping to Verizon Communications in the fourth quarter.

Sales of a broad range of products to the three merging carriers was down about $80 million from the same quarter last year, Tellabs said. At the same time, Tellabs deferred about $40 million in revenue related to its ROADM sales to Verizon. In accordance with that contract, Tellabs supplied Verizon with training, phone support and other incentives for buying its ROADMs in the fourth quarter but hasn’t yet recorded revenue for it. “Those are all costs with no revenues,” Wiggins said. “Pure margin deterioration.”

Tellabs is hopeful the new AT&T will resume its previous spending levels in the second or third quarter of this year but won’t begin to have a clear sense of that until it can observe a few weeks of first-quarter order flow.

Tellabs has been working with BellSouth on possible plans to upgrade the 1.5 million lines of fiber-to-the-curb (FTTC) that are currently served by Tellabs gear. But BellSouth’s new ownership casts some uncertainty on that initiative. “We have worked closely with BellSouth to identify a roadmap to IPTV on those 1.5 million lines,” Tellabs’ chief executive officer Krish Prabhu said. “Is it a hope or a plan? For now, we don’t have an identified, agreed-to plan. We’re waiting to hear what AT&T’s [capital spending] plans are for 2007.”

Still, Tellabs’ “best assessments”--including conversations with AT&T and BellSouth management--suggest a likelihood that Tellabs will supply new fiber access network construction for AT&T in the nine-state BellSouth region, Prabhu said.

Meanwhile, Tellabs has begun to market its FTTC gear to European customers. Prabhu claimed to have made “good early inroads” among tier-one European carriers with the 1100 platform, which has so far only been deployed by BellSouth.

Pricing has stabilized for Tellabs’ optical network terminals, the customer premises gear in its fiber-to-the-premises (FTTP) portfolio, Tellabs said. In early November, new lower prices for Tellabs’ ONTs went into effect. The vendor offered those lower prices to help keep competitors from stealing its seat as Verizon’s passive optical networks (PON) supplier as Verizon migrates from broadband PON to higher-speed gigabit PON this year. Tellabs’ ONTs have negative gross margins, but the company vows to spend the next few quarters working to bring them back to the small single-digit margins it reported for ONTs in last year’s second quarter, when the products broke even for the first time.

As ONT sales continue to be healthy, Tellabs said, sales of optical line terminals (the central office fiber access gear) and the PON cards that sit inside them have been flat for the last two to three quarters, suggesting that Verizon has been focusing more on turning up customers than on expanding its FTTP network to new markets. “As they reach out to more markets, I expect [Verizon] will start seating more OLTs in their [central offices],” Prabhu said.

In the second half of this year, Tellabs expects to ship more fiber access gear designed for multi-tenant units as part of what Prabhu called an “urban assault” by Verizon.

For the full year, Tellabs’ total revenue was up 8% to more than $2 billion.

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