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We maintain our long-term Neutral recommendation on ADTRAN Inc. (ADTN - Analyst Report). The company reported better-than-expected first quarter of 2013 financial results. Both the top and the bottom line outpaced the Zacks Consensus Estimate.

Why Keeping at Neutral?

ADTRAN has performed creditably despite a challenging business environment. The company is facing double-edged problems: (1) the communications equipment industry is currently going through a volatile phase due to uneven capital spending of telecom carriers, and (2) increasing competitive pressure within the industry. In the reported quarter, ADTRAN stabilized its businesses with the U.S. Tier 1 carriers, while generating contracts from several Tier 2 carriers. The Enterprise division also generated strong sales of IP gateway and switch products.Looking ahead, we expect the company to benefit from market share gain, new product offerings, solid international sales, and growing service revenues.

Risk/Reward Almost Balanced

We believe that the organic growth for the company will be largely based on recovery in spending pattern of tiered carriers and the Enterprise segment, increased penetration of TA 5000, professional services at domestic and international levels, mobile broadband infrastructure upgrades and funds generated through Broadband Stimulus projects. ADTRAN has declared that the company has received orders from a Tier 1 telecom carrier for which shipment will start from the second half of 2013. Additionally, the company is expecting to generate revenues from a second Tier 1 carrier in early 2014.

Nevertheless, the market for broadband access and IP networking equipment is highly competitive. The company competes with large and well-established networking OEMs both in the enterprise and carrier market segments. Competition would further increase if new companies enter the market or the existing competitors expand their product lines. An increase in competition will force ADTRAN to reduce its product prices and market share. Customer concentration is another major concern for the company.

Other Stocks to Consider

ADTRAN currently has a Zacks Rank #3 (Hold). Other stocks in the industry that warrant considerations include Symmetricon Inc. , Calix Inc. (CALX - Snapshot Report) and SBA Communications Corp. (SBAC - Snapshot Report). While Symmetricon currently has a Zacks Rank #1 (Strong Buy), both Calix and SBA Communications carry a Zacks Rank #2 (Buy).

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