April 24, 2008
No one ever said the residential access business was easy. Plagued by low profit margins due to pricing pressures from big carriers, it's one of the least forgiving industries to be in.
So why in this most recent quarter was there such a discrepancy in the broadband access results of Adtran Inc. (Nasdaq: ADTN) and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA)? Adtran did quite well compared with last year, while Tellabs saw its access business shrink. (See Tellabs Issues Profit Warning and Adtran Reports Q1.)
Table 1: Broadband Access Revenues
Source: Company reports
"It's sort of a classic product cycle story. Tellabs has a more mature, older product and footprint, whereas Adtran has a newer product in the TA 5000," says Simon Leopold of Morgan Keegan & Company Inc.
The TA 5000 has helped Adtran get more business with big carriers. Tellabs, meanwhile, hasn't been able to get much further with AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) since gaining their business through the acquisition of AFC. (See Tellabs Buys AFC for $1.9 Billion.)
Adtran's sales at AT&T jumped significantly due to the carrier's interest in the Total Access 5000 for Ethernet over copper applications, while Qwest Communications International Inc. (NYSE: Q)'s $300 million project to upgrade its fiber-to-the-node (FTTN) network increased sales of the Total Access 1100. (See Qwest Moves Quickly With FTTN and Qwest to Spend up to $300M on FTTN.)
The jump could be temporary, though. Adtran hasn't said much about its sales forecasts, and the overall access market remains weak.
Leopold cites Calix Inc. (NYSE: CALX) as an example. "We've gotten the impression that Calix as well is suffering," he says. "At a minimum, their growth has slowed."
On Tellabs's side, AT&T abandoned the fiber-to-the-curb (FTTC) project in the BellSouth region, gutting some expected business. Verizon's shift to GPON from BPON has also hurt, since Tellabs is the main BPON supplier to the FiOS project. (See Tellabs's Access Biz Under Fire.)
In fact, Tellabs gave up altogether on the idea of landing Verizon's GPON business. (See Tellabs Kills Its Verizon GPON Efforts.)
With access sales at Tellabs slipping and the company issuing weak predictions for this quarter, the company's shares have fallen nearly 14 percent since reporting earnings Tuesday. Adtran, meanwhile, enjoyed an 8 percent pop in its stock following its release last week.
But some analysts find those numbers a bit misleading.
"We believe part of the stock's eight percent rise was short covering, as sector investor sentiment remains negative," writes Lehman Brothers analyst Inder Singh in a research note last week. Investors short a stock -- selling shares they'll have to buy back later -- when they think it's going to go down. If a lot of those short positions end around the same time, the stock rises.
Adtran might also have benefited from low expectations. "Adtran typically experiences a seasonally weak first quarter, and it was expected that pattern would repeat in 1Q08," writes Brean Murray & Co. Inc. analyst Eric Buck in a research note. Instead revenues rose and beat the consensus street estimates.
— Raymond McConville, Reporter, Light Reading
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