Don’t Get Too Worked Up Over Adtran’s Current Challenges
Apr 23, 2018
Adtran, Inc(NASDAQ:ADTN) , a relatively small network equipment provider, hasn’t participated in the recent stock market rally.
In the last decade, demand for video and streaming audio has grown and many network equipment players experienced growth, but not Adtran. In 2011 it had the best year due to HDSL products. As demand for bandwidth has grown exponentially, service providers are looking for ways to improve existing infrastructure efficiency and reduce cap ex. The company took much longer than others to deliver products for changing customer requirements. To offer products for this changing dynamics, in 2013, it acquired the broadband division from Nokia which had much lower margins. Despite its initial promises, it never achieved pre Nokia margin level. In the last few years, its margins have further deteriorated due to increased competition, and telecom providers’ desire to reduce costs.
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Revenue (in thousands) | 500,676 | 484,185 | 605,674 | 717,229 | 620,614 | 614,744 | 630,007 | 600,064 | 636,781 | 666,900 |
| EPS | 1.21 | 1.17 | 1.78 | 2.12 | 0.74 | 0.77 | 0.80 | 0.36 | 0.72 | 0.49 |
| Revenue Growth | 5% | (3%) | 25% | 18% | (13%) | 3% | (2%) | (5%) | 6% | 5% |
| Gross Margin | 60% | 59% | 59% | 58% | 51% | 48% | 49 | 44% | 46% | 46% |
| Operating Margin | 23% | 22% | 25% | 26% | 9% | 8% | 7% | 2% | 5% | 6% |
| Debt to Asset | 10% | 8% | 7% | 6% | 5% | 6% | 4% | 4% | 4% | 4% |
| FCF % Sale | 21% | 17% | 14% | 19% | 12% | 8% | 7% | 1% | 3% | (9%) |
Demand for the broadband is not going to slow down. While fiber optics is great for speed, it costs a lot. Telecom and MSO operators want technology that delivers high speed at low cost. Technologies such as G.Fast, vectoring, NGPON2 are helping telecom providers to offer higher speed to their customers at lower cost.
The optical network used to be point to point. To reduce cost, passive optical network (PON), a point to multipoint architecture was adopted. In PON architecture, a single fiber link is shared by both uplink and downlink. It also uses splitters to share a fiber link with many end users. In this case, households get optical fiber directly to the residence, better known as fiber to the home (FTTH), but it is not a dedicated fiber strand. NGPON2 is the next generation PON architecture that increases the bandwidth and speed of fiber optics network.
While fiber offers gigabit speed, laying fiber cables all the way to customers is a costly affair. G.Fast and vectoring technology solves that problem. It uses existing copper wires to deliver high speed connectivity. Fiber is used up to the neighborhood, node or building and then existing copper wires are used.
Adtran offers G.Fast, vectoring, and NGPON2 products. It offers award-winning software-defined access solutions.
The exiting networking infrastructure will not able to handle the need for increased demand for speed and bandwidth due to Autonomous vehicles, Virtual reality, IoT, etc. Telecom providers like Verizon, AT&T are looking to invest in next-generation infrastructure 5G. NGPON2 is the basis for 5G. However, Adtran is not the only company that is investing in NGPON2. Many of its peers who have bigger R&D budget are also investing in NGPON2.
Last year, Verizon selected Adtran's and Calix 's NGPON2 products for its field test. While Adtran was not chosen for the initial field trial, it is still in dialog with Verizon, and the company is upbeat about that opportunity.
The company had strong exposure to Centurylink and will not be able to replace the lost revenue overnight. Most probably this year it will be under loss. However, it is in the business for more than 30 years and has established relationships with major telecom providers. It is not the first time the company had substantial exposure to one customer. Most years, it generates more than 10% of its revenue from one or more customers. Adtran has relatively strong products and excellent customer relationships. Centurylink’s decision might negatively impact the company in the short term, but in the long run, the company will resume its profitable growth and will continue to do business with Centurylink.
It is a geographically diverse company. It is generating strong revenue from international customers. Recently it received a purchase order for G.Fast from an Australian Tier 1 player called NBN. NBN is planning to start nationwide roll out in the second half of this year. Adtran is a very conservatively managed company. It is cutting cost to survive the current headwind. Its award winning software-defined access solution is example of its ability to innovate. In the long run, the company has products to ride the next wave of industry growth. It is a well-managed company and has a strong balance sheet. The company has been consistently buying back shares and pays a dividend.
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