ADTRAN Sees Lower Rev in 1Q

ADTRAN Inc. (ADTN - Analyst Report) expects the ongoing first quarter to be hit by a slower start to the seasonal buying pattern and a delay in orders due to new system implementations.

The company now expects revenue in the range of $130–$135 million. Previously, ADTRAN had projected stable revenue of $175.3 million.

The company expects to deliver lackluster sales to T1 customers given their lower spending, which would weigh on its overall revenue. The company’s traditional products, mainly HDSL will continue declining with increased market traction in Ethernet, optical (in particular OPTI-6100 access and aggregation solution) and fiber-based platforms. However, the three growth products namely Broadband Access, Optical Access and Internetworkingwill continue to drive top-line improvement.

Net income is expected to remain depressed due to higher professional services-related revenue, which carries lower margin. Although, ADTRAN remains focused on improving its cost structure, we believe that the company’s expansion plan with the proposed acquisition the NSN Broadband Access businessand increased overseas activities may stress its margin performance further, impacting earnings results.

Adjusted earnings per share are expected in the range of 22 cents to 25 cents. The company’s earnings would be adversely affected by 2 cents per share related to the acquisition of Bluesocket Inc. and the planned acquisition of the NSN Broadband Access business. In addition, stock-based compensation is expected to hurt earnings by 3 cents in the first quarter. Including these charges, earnings would be in the range of 17 cents to 20 cents.

The Zacks Consensus Estimate projects earnings of 44 cents for the first quarter, representing a decline of 15.51% from the year-ago quarter.

Further, customer concentration is the major and foremost risk for the company. Customers such as AT&T Inc. (T - Analyst Report), Verizon Communications Inc. (VZ - Analyst Report), and CenturyLink Inc. (CTL - Analyst Report) generate a major portion of the company’s revenue. As long as these giant and independent companies represent a substantial percentage of the company’s sales, any reduction or loss in business from these customers could negatively impact revenue growth, thereby restricting the company’s profitability.

We are maintaining our long-term Neutral recommendation on ADTRAN. Currently, the stock retains the Zacks #3 (Hold) Rank for the short term (1–3 months).