ADC Dips on Weak Outlook

Yesterday, after market close, ADC Telecommunications Inc. (ADCT - Analyst Report) declared financial results for the fourth quarter of fiscal 2009. Earlier, the Board of Directors of ADC had taken a decision to change its fiscal year from Oct 31 to Sep 30. As a result, fiscal year 2009 ended on Sep 30, 2009, which means the company got only two months as its fourth quarter. The fourth quarter of fiscal 2009 would, therefore, not be comparable to either the prior-year quarter or the previous quarter. For this reason, management has presented pro forma results for the three month period ending Sep 30 and its comparable quarter.
 
Actual revenue of fourth quarter 2009 was $183.9 million, below the Zacks Consensus Estimate of $189 million. Quarterly pro forma revenue was $293.6 million, down 17.5% year-over-year. This significant decline in revenue is the result of the global economic recession across all the three business segments.
 
On a GAAP basis, net loss in the quarter was $19.8 million or a loss of 20 cents per share compared to a net loss of $5.6 million or a loss of 5 cents per share in the prior-year quarter. However, adjusted net income (excluding $25.5 million special charges and $0.6 million loss from discontinued operations, net of taxes) in the reported quarter was $6.3 million or an income of 6 cents per share, higher than the Zacks Consensus Estimate of an income of 4 cents per share.
 
Pro forma gross margin for the quarter was 34.6% compared to 33% in the year-ago quarter. This reflects the aggressive cost cutting measures taken by management during the past one year. Pro forma quarterly operating expenses were $113 million compared to $106.2 million in the prior-year quarter.
 
At the end of the quarter, ADC had $610.9 million of cash & marketable securities on its balance sheet compared to $680.5 million at the end of the prior-year quarter. Total debt was $651.6 million at the end of the same quarter compared to $653.3 million at the end of the year-ago quarter. Pro forma cash flow from operations during fiscal 2009 was $86 million compared to $132 million in the previous fiscal. Pro forma yearly free cash flow (cash flow from operation less capital expenditure) was $54 million compared to $94.9 million in the previous fiscal.
 
Global Connectivity Solutions Segment
 
Actual revenue in the quarter was $143.3 million. Pro forma quarterly revenue was $228 million, down 18.8% year-over-year and also down 2% sequentially. This segment continues to generate the bulk (78%) of total revenue. Out of this, Fiber Connectivity accounted for 30%, Copper Connectivity 29%, Enterprise Connectivity 16%, and the rest 3% was provided by Wireline Connectivity products.
 
Network Solutions Segment
 
Actual revenue in the quarter was $13.5 million. Pro forma quarterly revenue was $23.8 million, down 21.7% year-over-year but up 6.3% sequentially.
 
Professional Services Segment
 
Actual revenue in the quarter was $27.1 million. Pro forma quarterly revenue was $41.8 million, down 6.7% year-over-year but up 12.6% sequentially.
 
Future Financial Outlook
 
Management has guided that its net sales in the first quarter of fiscal 2010 will be within the range of $250 million to $275 million, well below the Zacks Consensus Estimate of $271 million. The company is expecting a significant decline in telecom carrier spending during the first quarter. On a GAAP basis, EPS is expected within the range of a loss of 15 cents to a loss of 5 cents, which includes non-cash amortization expense of 5 cents per share and excludes potential non-cash charges or restructuring charges. This is also well below the Zacks Consensus Estimate of an income of 9 cents per share.

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