ADC Slips on Inventory Pileup

Is the fiber-to-the-home market about to go in the tank?

That's the question on the minds of some, as ADC Telecommunications Inc. (Nasdaq: ADCT) announced a revenue and earnings shortfall late Tuesday -- a shortfall attributed to softer than expected sales of its FTTx products. (See ADC Updates Q4 Outlook.)

Shares of ADC were down $3.94 (17.38%) to $18.73 in early afternoon trading today as investors absorbed the bad news.

ADC says it now estimates that its sales for the fourth quarter of fiscal 2005 will be "around $290 to $300 million," and that includes some $8 million in sales from its recent acquisition of FONS. (See ADC Completes FONS Acquisition.)

While that number is still an improvement over the company's year-ago sales of $264 million, it’s a far fall from the $321 million Wall Street analysts were expecting from the October quarter, according to Thomson First Call.

What's going on? ADC says the softer sales aren't because FTTx is suddenly passé. The company instead blames the "fourth quarter fluctuation" on "a temporary issue associated with an inventory buildup of FTTx products sold in the market."

To cope with the inventory stockpile, ADC is firing 400 of its workers in its Mexico manufacturing operations. And what Mexico giveth, Asia may taketh away. "We expect ADC will out-source more work to Asia as business recovers, which could help with costs and gross margin," writes Morgan Keegan & Company Inc. analyst Simon Leopold, in a note to clients this morning.

But though ADC sees sales of its fiber products picking up again in the future, the company also says it "anticipates lower-than-expected fourth fiscal quarter sales in amplifiers and services to wireless customers."

Still, the company seems to be in all the right markets at the right time, even though its traditionally seasonal business is somewhat upset by its customers' odd buying habits. "ADC faces promising end markets, and could grow faster than peers and carrier capital spending," Leopold writes.

Excluding its FONS business, ADC estimates it will earn between 15 cents and 19 cents a share during its fourth fiscal quarter. Again, that's slightly better than the year-ago quarter, when ADC reported earnings of 13 cents a share, but it's way off analysts' earlier estimate of 28 cents a share.

— Phil Harvey, News Editor, Light Reading