ADTRAN Upbeat as Q1 Results Reflect Stalled Spending

ADTRAN customers -- the great and small -- didn't spend as much as expected in the first quarter. CenturyLink's ongoing post-merger review, product availability issues for Deutsche Telekom and an overall spending slowdown by Tier 2 operators kept ADTRAN's first-quarter sales and earnings below expectations.

But, said ADTRAN Chairman and CEO Tom Stanton, these reversible issues should soon end and result in a much rosier outlook for the global provider of networking and communications equipment for the second half of the year and well into 2019.

For the first quarter of 2018, ended March 31, ADTRAN sales were $120.8 million compared with $170.3 million for the first quarter 2017. The reported net loss was $9.1 million; in the year-ago timeframe, net income was $6.7 million. Non-GAAP earnings per share were a loss of $0.29 versus income of $0.18 in the same period a year ago. (See ADTRAN Reports Record Q1 Earnings.)

"As we expected, our performance this quarter continued to be impacted by a merger-related review and slowdown in the spending at a domestic Tier 1 customer. While our international Tier 1 revenue exceeded expectations, lower overall product volumes resulting from the domestic slowdown, coupled with restructuring expenses and lower international gross margins, negatively affected our profit margins for the quarter and further hampered our results," said Stanton in a release.

Product sales decreased to $105.3 million in the most recent quarter, compared with $143.6 million in the year-ago quarter; services sales dropped to $15.6 million versus $26.7 million in the quarter ended March 31, 2017. The cost of sales also decreased, however, falling to $81 million for Q1 2018 compared to $96.6 million for both products and services a year ago, Chief Financial Officer and Senior Vice President of Finance, Roger Shannon, during an earnings call with analysts.

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CenturyLink began its post-Level3 acquisition review in the fourth quarter of 2017; since it represents 10% of ADTRAN sales across many technologies, the slow down in purchasing has affected many ADTRAN product lines, especially vectoring, due to sheer volume, Stanton said. "Vectoring hurt the most because it was the biggest. Anything that isn't business as usual -- adds and deletes or [Connect America Fund], which here again was impacted by a slow start -- is under pressure right now," he said.

In the case of DT, there was an issue with availability of line cards, said Stanton. Overall, he noted, Tier 2 operators have slowed down their purchases, with plans to deploy in the second half of the year.

Future forecast: rosier
ADTRAN's work with Verizon and NG-PON2 continues, Stanton said, and as new deadlines approach and the vendor's products are in the provider's labs, undergoing additional tests.

"We have some very tight timelines we're working with the customer on. From an engineering perspective, we just have to deliver. We expect a substantially strong 2019, not just stronger but strong, in its own right," Stanton said, regarding Verizon and NG-PON2. "We expect to see some material movements in the next couple of quarters. They are very important to the company so our engagement with the customer and that we're actually talking about real equipment, we have product in the lab today and it's a matter of us getting through that process as quickly as possible."

Part of ADTRAN's financial expenditures in Q1 arose from its acquisition of PON heavyweight Sumitomo Electric's EPON technologies and resources, along with a distribution agreement that opens up the Asia-Pacific market to ADTRAN. Despite success in Europe and North America, ADTRAN has barely targeted Asia-Pac, Jay Wilson, senior vice president of Technology and Strategy at ADTRAN told Broadband World News when the deal was announced in March 2018. The acquisition gave ADTRAN an immediate leadership position in the EPON market. (See ADTRAN Buys Cable Market Share With Sumitomo EPON Acquisition.)

Chinese telcos -- which account for more than half the PON spend worldwide have immense power over technology adoption due to the sheer size of their market and the infusion of government funds upon which they can rely, said Alam Tamboli, senior analyst at Dell'Oro Group in wide-ranging an interview last month.

Depending on their roadmaps, these service providers may well leverage next-generation EPON for many more years, he said. While this would not necessarily benefit vendors -- such as ADTRAN, Calix, Nokia and Huawei -- that develop XGS-PON or NG-PON2 solutions, it would further bolster the return ADTRAN can expect from its investment in Sumitomo's EPON technologies.

Australian customer nbn already signed purchase orders with ADTRAN; it's now a matter of going through the approval process and shipping the orders, Stanton said on the call. The solutions should arrive Down Under late in the second quarter or early in the third quarter, he said. "We know the size of the purchase orders we have in place and we have further purchase orders we expect to come in after that," Stanton added.

In addition, Gfast is gaining traction -- not only at AT&T, which is using the copper- and coax-based technology primarily outside its footprint -- but at other providers, especially those serving multi-dwelling units, he noted.

Related posts:

• ADTRAN New Mesh Network Promises Smarter WiFi at Home
• ADTRAN CFO on Fiber, NG-PON2 & 5G
• Pattern Emerges for ADTRAN's Mosaic

— Alison Diana, Editor, Broadband World News. Follow us on Twitter @BroadbandWN or @alisoncdiana.