Investor Destination

Why Shares of Adtran Are Sagging Today?

Shares of Adtran (NASDAQ: ADTN) plunged as much as 20% today after the company announced its preliminary third-quarter results. Despite Nasdaq dancing around an all-time high, Adtran continues to disappoint investors. Now the company expects $117 million in quarterly revenue, which is much lower than its previous estimate of $130 to $150 million and a loss of approximately $0.96 per share.

What is the reason?

The company is blaming lower revenue on slowdown by two of its top customers, Deutsche Telekom and Telmex. Everything is not a surprise. During the last quarterly conf call, the management warned investors about the slowdown by Deutsche Telekom. That was embedded in its revenue estimate. However, now the company results were significantly impacted by a pause in shipment to Telmex. The company expects Telmex sales to rebound, but its current visibility regarding timing is limited. For investors, it is like a déjà vu all over again.

In 2017, Century link, Adtarn’s then top customer paused its partnership with Adtran, and Century link never resumed that spending. Now, investors are wondering whether shipment pause to Telmex will resume or not. The slowdown might be temporary, or Telmex may be changing its direction, and Adtran may not recover that lost revenue from that customer. Investors are concerned about these uncertainties.

Now what?

For the last few years, the company has been diversifying to minimize dependency on any one customer. It is growing its international revenue. Last quarter the company generated more than 50% revenue from the international market

Despite its efforts to minimize dependency on any one customer, in the previous quarter, the company generated more than 10% revenue from three different customers from three different continents. Due to the nature of its business, the company will continue to generate more than 10% of its revenue from one or more customers. However, its diversification is helping the company, and in this quarter, its other business grew 20% over the last quarter.

In this connected world, geographic diversification will not protect Adtran from a global slowdown. However, it helps the company to mitigate risk.

The company is diversifying its product portfolio. It is enhancing its Software-defined access platform to help its customers improve their subscriber experience, and that is helping the company to gain market share. The company has been announcing many trial wins for NGPON and g,Fast. All of its trial wins will not result in contracts, but some of them will. Driverless cars need 5G infrastructure, and Tier 1 providers such as Verizon are committed. 5G will act as a growth catalyst for Adtran; however, it will be a slow process. The macro slowdown will add bumpiness.

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