Adtran navigates ‘constrained,’ ‘sluggish’ spending

While reporting solid second-quarter results today, equipment vendor Adtran acknowledged a tight spending environment in both the carrier and enterprise sectors.

The vendor reported 6% year-over-year revenue growth -- 30% among its new products -- and a 13% increase in net income. But the vendor said general economic conditions are working against it.

“Tier-two carriers have lowered their spending levels,” Tom Stanton, Adtran’s chief executive officer, said on a conference call today. “They’re being very careful on how they spend. We expect that mentality [to continue] going forward…We’re expecting a mood very similar to [that in] the last six to nine months.”

In particular, Embarq tightened its purse in the second quarter as it announced a deal to outsource some of its network operations to Nokia Siemens Networks. Last quarter, Embarq contributed 12% of Adtran’s total revenue, or about $14 million. This quarter, it spent something less than 10%, or about $13 million.

“We saw slowness in Embarq in general,” Stanton said when asked to distinguish between Embarq’s carrier division and its equipment vendor arm, Embarq Logistics. “I wouldn’t attribute it to one particular segment.”

At the same time, in terms of the specific projects among tier-one carriers that are driving Adtran’s growth, Stanton said, “We haven’t seen any change in their appetite.”

AT&T, Adtran’s biggest customer, increased its spending in the quarter to deploy more optical access equipment. Total sales of that gear were up 36% from a year earlier.

After commencing shipments of its Total Access 5000 platform to its first tier-one customer in the first quarter, Adtran received orders from a second tier-one carrier in the second quarter, for ATM-to-Ethernet aggregation, but didn’t start shipment before the quarter ended. The vendor expects a third tier-one customer to start placing orders in the second half of the year for multiple applications.

“The upside to sales once again stemmed from legacy gear, which is good news in the current environment,” Morgan Keegan analyst Simon Leopold said in a research note today. “We are optimistic about trends into 2009, but continue to worry that tightened capital spending by carriers could pressure the 60% of Adtran’s business that we think of as legacy products.”

When asked, Stanton said Adtran could win a deal to supply the $3-billion fiber-to-the-node rollout announced by British Telecom today, though the vendor’s international revenue was down 6% year-over-year in the second quarter, contributing just 6% of overall sales. “The lack of a historical relationship absolutely hurts your odds of penetrating these accounts,” he said. “You just have to deal with it. Do I think BT is a realistic potential customer? Absolutely.”

Adtran blamed a “sluggish” spending environment among small and medium businesses for the slight year-over-year sales decline in its business networking unit. Despite this, though, sales of the company’s Internetworking products were up almost 18% in the quarter, setting a new record for the seventh time in the last eight quarters. Though “muted by economic conditions,” he said, Stanton credited the success of its Internetworking business to tier-one carriers selling it as opposed to smaller resellers.

“The [value added reseller] base, the dealer base, is not as robust as you’d typically see in a normalized economy,” Stanton said.