Adtran lowers full-year guidance

A month after lowering its revenue expectations for the first quarter of 2006, Adtran lowered its expectations for the year by the same amount: $20 million.

In its first-quarter earnings call this morning, the access equipment vendor predicted it will report between $545 million and $570 million in revenue for 2006 and earnings per share between $1.30 and $1.40.

But the company said the full-year guidance revision wasn’t only reflective of its first-quarter revenue shortfall. On this morning’s conference call, company executives repeatedly bemoaned the difficulty in estimating full-year sales, especially given the unpredictability in the timing of optical equipment sales in particular.

Adtran lowered its first-quarter revenue expectations by $20 million last month when a single customer realigned its equipment distribution centers, causing a delay in sales of HDSL and T-1 equipment. (Clues in this morning’s call suggest that customer was Verizon Communications, which has contributed at least 10% of Adtran’s revenue in several recent quarters but not this one.) The customer, which has several warehouses for storing equipment, changed the locations in which it stores certain gear. More recent order activity from that customer suggests the issue has since been resolved, Adtran executives said, predicting HDSL sales to be flat or slightly positive for the full year. Adtran reported $41.1 million in HDSL/T-1 revenue for the first quarter, down from $61.1 million in the fourth quarter of 2005.

While revenue from Adtran’s optical access business was down sequentially from an especially good fourth-quarter, revenue from Adtran’s broadband and NetVanta product lines saw strong growth in the first quarter, the company said. For the first time, the NetVanta group contributed more than 5% of the company’s quarterly revenue.

Sales of integrated access devices (IADs) were down both sequentially and from a year earlier, which Adtran attributed to pressure on the primary customers for IADs: competitive local exchange carriers. Over time, the IAD market that is now based largely on ATM and time-division traffic will evolve into IP-based systems and, in doing so, will remain a growth market, said Chief Operating Officer Danny Windham. Adtran began shipping IP-based IADs in noticeable volumes for the first time in this year’s first quarter, he said.

Adtran’s change in full-year revenue expectations surprised at least one analyst. In a research note issued before this morning’s call, Lehman Brothers analyst Marcus Kupferschmidt expressed optimism that Adtran would maintain its full-year guidance since its first-quarter results hit the middle of its revised guidance and since “management was very excited about the full-year outlook when it presented at [the TelecomNext trade show] in late March.”

In addition, he wrote, “We expect a meaningful uptic in [this year’s second half] driven by opportunities for the new products, plus the potential to take a few million dollars per quarter of additional T1/HDSL market share at some time in the future.”

Adtran introduced two new products in the first quarter: the NetVanta 7100 IP PBX switch/router and the Total Access 5000 fiber access platform, which entered several trials near the end of the quarter. Adtran executives expect the 5000 to be deployed initially by tier-two and tier-three carriers for traditional voice and TDM broadband applications and later as an aggregator.

In another research note issued before this morning’s call, Morgan Keegan analyst Simon Leopold said Adtran, which supplies AT&T and Verizon with broadband gear outside of their high-visibility fiber-to-the-node and fiber-to-the-premises rollouts, may be neglected somewhat as the two carriers focus more on those rollouts. However, Adtran’s “portfolio and strategy sound on target,” Leopold wrote, and the company faces “a range of attractive opportunities.”

Adtran reported $108.6 million in total first-quarter sales, up less than 4% from a year earlier. Total system sales were up 16% from a year earlier to $55.4 million.