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 .)

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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

bosco_pcs 10/5/2014 | 7:51:53 PM
Re: Adtran is a survivor So embarrassing - what seven (@brooks7) said is 10x better than what i could've done! Thanks :)

With regard to company's admitting lumpiness, maybe the investing community has finally learned the lesson. Smart analysts see through tricks like stuffing the channel and other financial smoke & mirror. These days, it is more about trying to manage expectations. CEO Tom Stanton seems to believe the sales in Europe are delayed (to 2015) but not going away entirely due to competition or obsolescence - and it makes sense, Europe is not doing so well - so investors can take that into considerations
brooks7 10/5/2014 | 5:08:16 PM
Re: Adtran is a survivor Dan,

Adtran is a lot different than most companies their size.  They have a relatively broad product line that has products in various parts of their life cycle.  They do a good job of managing this, but not perfect.  What this creates (and you can see this going back for more than 10 years in articles on LR) is all kinds of strange growth ideas about Adtran.  They have been a stable, slowly growing company that remains profitable.  They have lumpiness in their product life cycles that is not seen in other companies because of this.

The general lumpiness is related to the starting and completion of deployments.  Let's say you are a carrier and say you are building out an LTE network.  You build it and the vendors get a batch of revenue from it.  The general build ends and you do some augmentation of the network, so they get some ongoing revenue at a much lower level (see Cyan for an extreme version of this).  

What used to happen that filled in the gaps was what was called rehab.  The networks did not change much and there was significant spend on updating previously deployed boxes with the latest generation of the boxes that filled that spot in the network.  That does not happen anymore.  Because their is no value to the carrier to deploy newer Class 5 switches (as an example) nobody rips out a 5ESS.  When one dies, they will replace it with something different (for example a VoIP switch).

What this means to product lines is that you end up with a winner take all deployment of a product and a long tail in upgrade and support.  This is VERY different than behavior say circa 2000.  Let me use the following products and ask the question, who is qualifying new versions of:  CO DSLAM, Class 5 Switch, SONET Multiplexer, DACS.  Network operators build new services that move to new products and retire the old ones very slowly.

One of the huge challenges for major telecom equipment vendors is that they have not completely shifted their thinking.  They invest too much in older products still.  No major telco is ripping out a 10G Network.  So why work on it?  Slow upgrades might be required but companies need to put their money into new products at all time.  The challenge as we all know is this is a hire wire act in many ways.  In a lot of ways, it is actually cheaper to buy startups (if there are any) in that space that have "traction".


DOShea 10/5/2014 | 2:22:33 PM
Re: Adtran is a survivor Lumpy is good - that seems to be the view more often nowadays, not just with Adtran, but a lot of companies. Is it the fickle nature of the carrier and enterprise markets, or the economy in general?
bosco_pcs 10/3/2014 | 3:09:56 PM
Adtran is a survivor I've been watching the ups and downs of Adtran for at least a dozen of years. While the heady days during the tech bubble is unlikely to return, it manages to handle the ebbs and flows. It is definitely lumpy, like a telecom should be. 
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