ADC Feels the Pain
ADC Telecommunications Inc. (Nasdaq: ADCT) edged into the low end of reduced expectations Thursday when it reported a second-quarter pro forma net loss of $115 million, or 15 cents a diluted share (see ADC Reports Q2 Earnings). That’s a far cry from the company’s pro forma earnings a year ago of $72 million, or 10 cents a share. Revenue for the quarter, which ended April 30, sank to $652 million, compared with $771 million a year ago.
In a March 28 guidance note to analysts, ADC expected a second-quarter loss of 10 cents to 15 cents a share on sales of $650 to $700 million.
The company’s actual net loss for the quarter, which includes the impact of all non-recurring expenses, charges, and credits, came in at $1 billion, or $1.33 a share. Last year, ADC had net earnings of $718 million, or 96 cents a share.
For ADC, like most telecom equipment makers, it’s been a whirlwind ride. During the boom of 1999 and 2000, the maker of broadband connectivity equipment spent more than $200 million adding and expanding manufacturing facilities and increasing the payroll by 8,000 employees.
But now, as debt-saddled carriers slowly work off excess inventory, their spending plans are still unclear. Competitive local exchange carriers (CLECs), which represent a significant portion of revenues, have been hit the hardest. ADC reacted to this customer downturn earlier this year by lowering sales and earnings projections three times in as many months.
Now taking a cautious approach to the uncertain future, ADC is in the midst of slashing 3,000 to 4,000 jobs. This comes on the heels of another round of layoffs, starting late last year, which eliminated 3,000 jobs.
Meanwhile, a price war among equipment makers is slaughtering profit margins. ADC reported a 19 percent second-quarter gross margin, down from 47 percent a year ago.
But in ADC’s case, another factor contributed to the margin shortfall and may continue to suppress margins. Stephens Inc. analyst Charles Pluckhahn says some of ADC’s highest margin products, such as DSX patch panels, will come under increasing price pressure because they have long life spans and can easily be reused. “When the nuclear war comes, two things will survive,” says Pluckhahn. “Cockroaches and DSX patch panels.”
ADC officials have narrowed future growth opportunities to optical networking, Internet cable, DSL (digital subscriber line) equipment, and networking software. ADC is considering eliminating wireless, some cable telephony, and CSU/DSU lines. The future of ADC's venture capital arm is also questionable as the value of its investments has plummeted.
But some observers think ADC may not be narrowing its focus enough. For instance, Pluckhahn, who is neutral on the company, notes ADC’s DSL sales in 2000 “had shrunk to well under 10 percent of revenues.” And he says Adtran, a key competitor, holds a strong lead in the healthiest DSL segment, the equipment regional Bells use for deploying DS1 (also known as T1 circuits, 1.544 Mbit/s) over copper.
ADC acknowledges a difficult third quarter with projected pro forma earnings ranging between a five-cent-per-share loss and break-even. The company expects third quarter sales of $600 million to $650 million. Most analysts don’t expect a significant industry rebound for about a year.
Late Thursday in the aftermarket, ADC was trading at 9.39 a share, down from the day’s close of 10.29. That’s a far cry from a 52-week high of 49.
- Tom Davey, special to Light Reading