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ADTRAN Inc.: Boosting Earnings?

April 08, 2014 | About:

ADTRAN Inc. (ADTN) is a leading global provider of networking and communications equipment, designing, manufacturing and marketing network access solutions. The company develops high-speed network access solutions for use across Internet protocol (IP), asynchronous transfer mode (ATM) and time division multiplexed (TDM), using copper, fiber, and wireless. Its solutions are currently in use by service providers, private enterprises, government organizations, and millions of individual users worldwide.

The company maintains two operating divisions: the Carrier Networks Division and the Enterprise Networks Division. The Carrier division includes services to deliver voice, data and video, and the Enterprise division provides products used by enterprise customers to construct voice, data and video networks. The company's three major product categories are Carrier Systems, which includes broadband access products; Business Networking, which includes Internetworking products; Optical Network Terminals (ONTs); and Integrated Access Devices (IADs); and Loop Access, with products such as Digital Data Service (DDS) and Integrated Services Digital Network (Total Reach).

Fourth quarter of 2013 reported mixes results. Even though total revenue of $159.1 million was up 13.8% year over year, it fell behind esteemed numbers. However, quarterly adjusted earnings per share were $0.21, above projected EPS of $0.14. The company still faced global macroeconomic fluctuations, foreign currency risks and a stiff competition.

The Company

The competition in this industry is intense, and business environment is always posing challenges. ADTRAN has continued to perform creditably despite two major industry problems: the uneven capital spending of telecom carriers which has led to high volatility in the communications equipment industry, and the increased competitive pressure within the industry. Nevertheless, the increased penetration of TA 5000 platform, professional services both in the US and abroad, mobile broadband infrastructure upgrades and funds generated through Broadband Stimulus projects are likely to sustain the company’s growth.

Moreover, ADTRAN will profit from TA 5000 and FTTN platforms’ strong momentum, due to the network upgrade to Ethernet — primarily by Tier 2 and Tier 3 carriers — as well as higher broadband incentive. Optical Access is expected to grow given the increased demand for fiber-based platforms, and the recent acquisition of the fixed-line Broadband Access business from Nokia Network and Solutions (NSN) boosted growth prospects. ADTRAN is focusing on developing NSN selected products using its supply chain, aiming to increase global presence. The firm’s core products Broadband Access, and Internetworking and Optical business generated record revenues of $142.9 million, up 25% year over year.

New Services

ADTRAN announced it will start providing services to a Tier 1 telecom carrier and is expecting a contract from a second Tier 1 carrier in 2014. The largest telecom service provider of Indonesia, Lintasarta, has recently signed a deal with ADTRAN for the supply of the TA 5000 platform. Furthermore, the launch of the Crossover solution will boost network speed and reduce the cost of installation, enhancing ADTRAN’s technical services and supporting program division.

ADTRAN Inc. (ADTN) has announced as well the launch of ProCare Help Desk for resellers and service providers offering ProCloud wireless LAN (WLAN) manage services. This new service provides a comprehensive support to managed service providers. The new ProServices platform offers an innovative ProStart installation program, ProCare maintenance program and ProCloud managed networking services, with streamlines wireless user connectivity support processes from start to finish. It provides a comprehensive portfolio of wireless support, and permits meeting the needs of customers with multiple locations, being therefor especially well-suited for vertical markets that include education, hospitality, retail, restaurants and more.

Furthermore, the company has released an upgrade to its virtual wireless LAN (vWLAN) solution, which includes new features such as built-in high availability for always-on anywhere access, a more simple and intuitive graphical user interface (GUI), and customizable dashboards that report real-time and historical views into the health of the network. These improvements will probably make it easier for managed service providers and resellers the launching and managing of cloud Wi-Fi services, adding an expanded service portfolios and greater revenue opportunities. Mads Lillelund, general manager WLAN Solutions, recently said: “ADTRAN’s latest vWLAN enhancements exemplify the company’s ability to develop feature-rich solutions that add value to the network. We’ve built in the capabilities that matter most to businesses, making it easier than ever for managed service providers and resellers to enter the cloud Wi-Fi services market and win.”

Industry Setbacks

The market for broadband access and IP networking equipment is highly competitive, and ADTRAN’s products must comply with various regulations and standards, defined by the Federal Communications Commission and Underwriters Laboratories. Competition is intense within this industry, with large and established networking OEMs, new companies entering the market and others expanding their product lines. Pricing power might be affected given the increased competition, and spending on product development and its marketing is likely to rise as well. Moreover, the fact that this market is subjected to various regulations and standards leads to increased cost, as companies have to comply constantly with changing standards in order to maintain approvals.

Bottom Line

Indeed ADTRAN has had hard time growing revenue and still trades at an expensive 39 times earnings. Firm’s Chief Executive Officer, Tom Stanton, stated: “Although revenue for the quarter came in lower than expected, operating income increased approximately 74% over the same period last year driven by significant improvements in gross margin,” and added “The significant acceleration we saw in bookings exiting the quarter leads us to anticipate revenue in the second quarter of 2014 to be in the range of $172 million to $180 million.”

Still, the company perceives growth in its European business, the enterprise business continues to perform strongly and revenue in this segment has grown 20% from the year-ago period. ADTRAN’s sales channel has been strengthened, and the hosted voice over IP service saw an initial launch by a Tier 1 carrier in the U.S. The company’s financial results will be released in the next weeks, and investors are thinking this stock might increase earnings. Still, analysts are suggesting a hold on this stock, to see future performance.

Disclosure: Damian Illia holds no position in any of the stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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