Adtran anxiously awaits AT&T’s next moves

Adtran joined Tellabs today in predicting that conditions which led to revenue shortfalls in last year’s fourth quarter will continue in this year’s first quarter.

Adtran warned in December that fourth-quarter 2006 revenue would be about 14% lower than previously expected, falling between $108 million and $112 million. Today the access equipment vendor reported fourth-quarter revenue in the center of that range, $110 million, and predicted first-quarter revenue will drop 2% to 7% sequentially, falling between $102 million and $108 million.

“We assume the environment in the first quarter is the same as we saw in the fourth quarter,” Adtran’s chief executive officer Thomas Stanton said.

Adtran explained last month that its biggest customer, AT&T, curbed spending late last year as it worked to close a merger with BellSouth (unlike other vendors, however, Adtran has said it isn’t certain the merger was to blame). Other customers Embarq and Windstream also cut spending at the time in an apparent attempt to stay within their annual budgets.

On Adtran’s earnings conference call today, some analysts suggested the company’s view of the first quarter could be overly pessimistic, given reasonable expectations that Embarq and Windstream could return to normal spending now that their annual budgets have reset with the new year. While that may be true, Adtran executives acknowledged, the spending behavior of AT&T is much harder to predict.

“We understand those slowdowns [at Embarq and Windstream] a little better than AT&T,” Stanton said. “AT&T is one we don’t understand as well because I don’t understand what the goal is.”

AT&T contributed 19% (or nearly $21 million) of Adtran’s fourth-quarter revenue, more than any other customer, including Verizon, which contributed 14%, and BellSouth, which contributed 4%.

Earlier this month, Adtran’s chief financial officer Jim Matthews told attendees at an investor conference, “We’re certainly seeing order flow, but not to the extent we saw before we entered the third quarter.”

AT&T frustrated Adtran last year through the slow pace of its evaluation of the vendor’s optical gear for its wireless backhaul needs. Adtran lowered its 2006 revenue expectations in July, citing the uncertain timing of that business. The vendor claimed to have made progress on that front in the fourth quarter, but admitted sales of its optical gear to major carriers was notoriously unpredictable.

Adtran began shipping its optical access platform to three major carriers in the fourth quarter: AT&T, Qwest Communications and Verizon Business. AT&T has approved Adtran’s gear for use in its cell sites and customer premises, Adtran said. The company reported $8.9 million in optical access revenue for the quarter.

“Those initial shipments are not, in and of themselves, meaningful,” Stanton said. “At least we got the things approved and started rolling.”

Using history as a guide, he said, regularly recurring revenue from that business could hit its stride in six to nine months, but predicting the timing of such deployments among major carriers is “nearly impossible.”

“It’s just a difficult animal,” he said. “We’ve got some very large customers very interested. The larger the customer, the longer it takes.”

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