Adtran lowers 2006 expectations again

Three months after lowering its revenue expectations for 2006, Adtran lowered them again this morning, citing uncertainty in sales of some of its optical products this year.

Whereas in April, Adtran expected 2006 revenue between $545 million and $570 million (a $20-million reduction from previous expectations), it now expects $500 million to $515 million. And whereas it previously expected to earn between $1.30 and $1.40 per share this year, it now expects between $1.13 and $1.20.

The move puzzled some analysts, since Adtran this morning described a “rebound” in sales of HDSL gear in the second quarter. When Adtran lowered its expectations in April, it followed a drop in sales of HDSL gear resulting from one big customer realigning its product warehouse locations. (That customer was probably Verizon Communications, which contributed less than 10% of Adtran’s first-quarter revenue but 13% of its second-quarter revenue.)

Adtran reported $57 million in revenue from HDSL and T-1 equipment in the second quarter, up from $41.1 million in the first quarter but down slightly from a year earlier due to a year-over-year decline in sales of T-1 termination gear.

When asked what changed in the six months during which Adtran has twice lowered its annual revenue expectations, chief executive officer Thomas Stanton cited the company’s 6100 line of OC-3/OC-12 Sonet multiplexers as a major factor. “It’s probably more product-specific than anything,” Stanton said of the twice-lowered guidance. “Coming into this year, we had--and for all practical purposes still have--a lot of opportunities in front of us. As we go through the year, we get smarter and smarter. The opportunities are still in front of us but haven’t delivered at this time. A lot of people are cognizant of what they are, and a lot of it is around the 6100 product family.”

Adtran may yet realize the hopes it originally had for the 6100s this year, Stanton said. It may even win the business it wants but at a later time. But the company won’t count on it this year and lowered its expectations accordingly. “All the major deals are intact, but we’re not planning on all those deals coming online this year.”

Adtran is also seeing declines in sales of its 303 concentrators, which the company expects to continue, and its 1500 narrowband access shelves, which is designed for a specific niche and therefore erratic.

“None of these tend to die with a very steep slope,” said Danny Windham, Adtran’s chief operating officer, apparently referring to the 303 concentrators. “They tend to just trickle down quarter to quarter.”

Sales of Adtran’s ATM-based integrated access devices (IADs), though up sequentially in the second quarter, are threatened by carriers’ increasing preference for IP-based versions. (Adtran began shipping IP-based IADs in volume in the first quarter.) But IAD sales are also being affected by consolidation among its chief customers: competitive local exchange carriers (CLECs). Not only are mergers and acquisitions disrupting CLEC network buildout plans, they are allowing merged CLECs to leverage the buying power of their new bulk when negotiating equipment contracts, Windham said.

“We’ve seen price compression in our IAD family specifically because of those [CLEC] mergers,” Windham said.

A small amount of Adtran’s second-quarter revenue came from the Total Access 5000 fiber access platform it unveiled in March that is now engaged in over a dozen customer trials, the company said.

Adtran reported $122.3 million in revenue for the second quarter, up nearly 13% sequentially and nearly 3% from a year earlier. Revenue from broadband access and optical products were up both sequentially and from a year earlier.

“Continued strong customer interest in Adtran’s new products, coupled with the potential for legacy product success and market-share gains, enables us to maintain our posture that the company has potential for new market share wins and higher sales growth beyond this year,” Lehman Brothers analyst Marcus Kupferschmidt wrote in a research note before this morning’s conference call.

Relative to his expectations, Morgan Keegan analyst Simon Leopold called Adtran’s second-quarter earnings “a bit light.”