ADTRAN Beats on Bottom Line

ADTRAN Inc. (ADTN - Analyst Report) reported second quarter 2012 adjusted earnings of 38 cents per share, beating the Zacks Consensus Estimate of 36 cents but deteriorating from the year-ago adjusted earnings of 59 cents.

Adjusted earnings per share for the quarter exclude the impact of 5 cents in amortizations and expenses related to the acquisitions of Nokia Siemens Network’s Broadband Access (NSN) business and Bluesocket. It also excludes impacts of 3 cents related to stock-based compensation expenses and 3 cents in bargaining gains related to NSN and Bluesocket acquisitions.

Apart from the negative impacts of the company’s expansion plans, acquisition expenses and increased overseas activities ADTRAN earnings were also affected by the weak spending pattern of customers that in turn hurt its overall revenue. Additionally, the company’s traditional products, mainly HDSL, continued to deteriorate with increased market traction in Ethernet and fiber-based platforms.

The revenue remained flat year over year at $184 million and missed the Zacks Consensus Estimate of $186 million.

The company’s organic growth was primarily driven by its three main growth products –– Broadband Access, Internetworking and Optical Access –– representing 84% of the total revenue. The combined year-over-year growth for these products was 17%. Individually, Broadband Access shot up 38% year over year. Internetworking products grew 6%.

Operating income plunged 47.7% year over year to $26.8 million. Selling, general and administrative expenses and research and development expenses increased 16.2% and 31.8%, respectively.

Liquidity

ADTRAN exited the second quarter with cash and cash equivalents of $37 million compared with $36.5 million at the end of first quarter 2012.

The company’s long-term obligations to pay bonds remained unchanged from first quarter 2012 at $46.5 million.

Dividend

The company’s board of directors declared a cash dividend of 9 cents per share for the quarter. The dividend will be paid on August 9 to shareholders of record on July 26.

Our Analysis

We believe ADTRAN is well positioned to benefit from current market dynamics. Additionally, the company’s three key products lines have registered continued revenue growth. The company is also benefiting from several new product cycles in broadband access, wireless backhaul products, fiber to the node, Ethernet over copper, optical and enterprise VoIP.

However, we expect that the acquisition of the NSN fixed-line Broadband Access business would continue to weigh on ADTRAN’s earnings performance this year given its weaker existing market shares. Further, the declining performance of the company’s traditional product line, HDSL, lower spending by Tier 1 carriers and its heavy reliance on its key customers such as AT&T Inc. (T - Analyst Report) and Verizon Communications (VZ - Analyst Report), along with regulatory issues in the telecommunication industry, contribute to our cautious stance on the company.

Consequently, we are maintaining our long-term Neutral recommendation on the stock supported by a Zacks #3 Rank (Hold).