Lower Revenue in Europe Alters Adtran's Q3

Adtran's stock value dipped nearly 7% Friday morning after the vendor Thursday night lowered its quarterly revenue and earnings outlook, in what looks like a brief blip that can be traced to slow spending in Europe and the enterprise market.

After a vibrant second quarter in which it posted sales of $176 million, the company said in a statement that third-quarter revenue would end up around $162 million to $163 million, below the financial analyst consensus of about $177 million. Adtran Inc. (Nasdaq: ADTN) itself earlier had predicted flat revenue growth for the third quarter, but CEO Tom Stanton noted that the vendor experienced a "more than expected sequential decrease in our European business and a softer enterprise spending environment." (See Adtran Issues Q3 Earnings Warning.)

Raymond James analyst Simon Leopold said in an analyst note that exchange rates might have played a role in the unexpected slide. "At the end of June, the exchange rate stood at $1.36 to the Euro vs. $1.27 today, a 7% drop; thus giving European customers less purchasing power," he wrote.

Leopold also noted that Adtran has significant European market exposure through major customer Deutsche Telekom AG (NYSE: DT), but Adtran's future business with DT looks pretty promising as it is a major supplier to the German incumbent's current fixed broadband network upgrade and is set to part of the German telco giant's next generation TeraStream network project, which could involve Adtran's planned G.fast product. (See {doclink710843}.)

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Despite the quarterly disappointment, Adtran is talking big for 2015. Stanton said the vendor saw increased spending by US carriers in the third quarter, and that the company still expects carrier spending to increase both in the US and Europe next year. Analysts agree much of that optimism hinges on AT&T's spending for 2015.

"We continue to view the 2015 Adtran investment case as highly dependent on AT&T," wrote MKM Partners managing director Michael Genovese, in his own research note. He added that he still expects sales to AT&T to rise next year, but cautioned that other vendors have recently given pricing concessions in their sales to Ma Bell.

— Dan O'Shea, Managing Editor, Light Reading