Can This Beaten Down Equipment Maker Turn Things Around?

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The prevailing economic uncertainty has led telecom companies to keep their spending on a tight leash. As a result, equipment suppliers and component makers are having a torrid time this year. For instance, communications equipment maker Ciena (NASDAQ: CIEN) was clobbered last month after it posted a bigger than expected loss and guided lower than the Street.

Ciena’s management stated that the company was facing troubles due to a sluggish macro environment as its customers were delaying their spending. This month, another maker of networking and communications equipment, ADTRAN (NASDAQ: ADTN), came out with its third-quarter results and sang along the same lines as Ciena.

A Few Details

ADTRAN’s revenue declined almost 16% from last year to $162 million in the quarter, while earnings more than halved to 20 cents a share as against 56 cents last year. The company is facing sluggishness in both carrier networks and enterprise networks and this weighed on its top line.

HDSL, which is ADTRAN’s legacy business, has been on the decline for quite some time now and it went from bad to worse last quarter. The HDSL business almost halved from the year-ago period as a major Tier 1 carrier reused its installed inventory rather than buying from ADTRAN. As far as Tier 2 and Tier 3 carriers are concerned, ADTRAN held them accountable for a major portion of the revenue decline.

What Ails ADTRAN

As carriers have slowed down their spending or delayed projects, ADTRAN’s stock price has suffered a lot. Shares have almost halved this year and are trading close to their 52-week lows. But slow spending has not been the only bane for ADTRAN. The company derived a significant portion of its revenue from AT&T (NYSE: T) last fiscal year and as such, one would have expected ADTRAN to benefit from AT&T’s effort to boost its 3G and 4G networks.

AT&T plans to move all of its customers to 3G and 4G networks in the next four years. As such, the carrier will be incurring the required expense to build these faster networks. In such circumstances, a communications equipment maker like ADTRAN should have benefited from its major customer. However, that might not be the case as ADTRAN’s legacy product delivers “high-speed digital communications over the local loop utilizing copper wire” (taken from Risk Factors in 10-K).

But, as coaxial cable and mobile wireless gain strength, local loop access would suffer. Hence, the company needs to work overtime on product development so that it can bring its products up to speed in order to benefit from the data boom going forward.

Lamps in the Dark

However, ADTRAN did provide positives, although they were very, very few. It won a multi-year contract at a Tier 2 carrier for broadband networks, giving it a 90% share at that carrier. In addition, it added 27 Tier 3 customers to its portfolio. These contract wins are indeed impressive and should help ADTRAN gain some of the lost ground in the future when telecom spending picks up.

The Takeaway

ADTRAN has had a difficult time for the past one year, witnessing revenue declines along with falling gross margins and earnings. The company did add some customers in the last quarter, but that seemed to be the only positive takeaway. ADTRAN will need to exhibit an improvement in margins and focus more on product development if it wants to succeed going forward.

I would wait for ADTRAN to stop the decline it is currently experiencing as its customer wins do hold potential that can be exploited in the future. You can also do the same by adding ADTRAN to your Watchlist by clicking here, and keep an eye on how it fights through its current predicament.

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