ADC Shares Perk Up
"It's hard for us to understand the reasons behind the meltdown in the telecom equipment sector in general," said CEO William J. Cadogan. "And we are at a complete loss to understand the huge downdraft in ADC's share price." He says there are a few "fallen stars" in the carrier market, but notes that hundreds of carriers internationally have plans as well as the means to expand their networks considerably.
Cadogan said concerns about reduced carrier capital expenditure for next year are "overdone" and that analysts are seeing "phantom issues where real ones don't exist." To support his point, he cited ADC's record quarterly sales of $1.03 billion (up 63 percent year to year and 19 percent sequentially) and predicted continued growth for the vendor of at least 36 percent in earnings per share and 25 percent in revenues for 2001.
Besides reporting record sales and good growth predictions, the vendor reported earnings per diluted share of $0.18, a penny better than most analyst estimates based on earlier company guidance. Pro forma net income grew 94 percent, to hit a record high of $138 million. Pro forma earnings before interest, taxes, depreciation, and amortization (EBITDA) for the quarter were up 108 percent, to $253 million, or $0.32 cents per diluted share.
Also highlighted in the presentation was ADC's aggressive investment strategy, which has produced $1.1 billion in marketable securities from several optical startups in which ADC's invested $347 million (see ADC's Power Investment Strategy).
The earnings announcement seems to have bolstered faith in ADC in particular, but barely dented analysts' stubborn concerns about telecom capital expenditure overall.
"No, they [ADC] haven't convinced the market it's over," says Tim Savageaux, infrastructure analyst with W.R. Hambrecht & Co., speaking of the threat of a slowdown. Still, he says ADC's successful diversification, geographic spread, and mostly strong numbers "speak positively to the overall environment" and encourage investors that it may not be a good idea to view all companies in the sector as potential targets for a capex famine.
Cadogan's statements last night point to why the vendor can't totally dispel capex concerns. During his presentation, Cadogan acknowledged that ADC's growth is slated to outpace that of the overall market. And he repeatedly compared ADC's results favorably against its chief competitors' -- not exactly a strong argument for the strength of the sector overall.
Cadogan also made it clear that new growth will come not only from direct sales to carriers but to equipment OEMs (original equipment manufacturers) as well. For instance, he pointed to ADC's access and fiber optic products as key contributors to the $300 million to $500 million he expects to see in new-product revenues for 2001. Among the new offerings are 980-nanometer pump lasers and tunable lasers that Cadogan says already are shipping to ten customers and under evaluation by 30 more.
All this helps alleviate some analysts' concerns about ADC's reliance on CLECs (competitive local exchange carriers), which the vendor says accounted for 5 to 10 percent of its revenues this year. "While ADC sees robust sales from larger incumbent service providers and OEMs, we believe this should more than offset our continued concern regarding the company's exposure to the CLEC community," wrote analyst James Jungjohann and colleagues from CIBC World Markets in an equity research note this morning.
But Cadogan seemed bent on dismissing concern about any slowdown at all in carrier spending. He maintains that ADC's input from CLEC customers grew 200 percent last quarter -- despite several customers in crisis. "They spent beyond our expectations," he said.
-- Mary Jander, senior editor, Light Reading http://www.lightreading.com