Analyst reports: Wall Street berates Adtran

Huntsville, Ala.-based Adtran, which makes equipment to deliver high-speed Internet connections, announced Friday that fourth-quarter net income will be $6.5 million to $8 million, or 16 cents to 20 cents a share. Analysts had expected 55 cents a share, according to a poll by First Call/Thomson Financial.

Adtran stock sank to $18.19 in early trading on Monday before a midday rebound to $24.13. The company's shares are down 14 percent since Friday and about 53 percent from the beginning of the year.

During a conference call with investors Friday, executives said customer orders increased during the first three quarters of the year, but that trend reversed in November.

Several analysts suggested that Adtran's shortfall may be a precursor to broader weakness in the corporate networking market. But others expressed shock at the depth of the shortfall--and dissatisfaction with the company's official explanation.

"Although we (had) been expecting negative news in the conference call last Friday, the magnitude of management's change in guidance was far more substantial than we had anticipated," Greg Mesniaeff of Robinson-Humphrey wrote in a research note issued Monday. Mesniaeff maintained his "buy" rating but slashed his 12-month target price from $55 to $30 per share.

Analysts at investment banks Deutsche Banc Alex Brown, Raymond James and Chase Hambrecht & Quist downgraded Adtran from "buy" to "market perform." Wachovia Securities cut it to "neutral."

Stephens analyst Charles Pluckhahn slashed his fiscal 2000 earnings per share from $1.98 to $1.60 and his fiscal 2001 earnings per share from $2.39 to $1.88. He also dropped his 12-month target price to $32 per share and cut his rating from "buy" to "outperform."

Pluckhahn, who likes to focus on "primary issues," thought that Adtran executives' explanation for the shortfall was "mechanically complex." They blamed an anticipated write-down of inventory of its new, high-bit-rate digital subscriber line (DSL) equipment, known as HDSL-2.

Pluckhahn partly blamed a sharp decline in sales of access concentrators and other customer-premise equipment to corporate users. Such "enterprise" sales constituted 37 percent of the company's third-quarter revenue and 41 percent of its gross profits, the percentage of revenue that remains after deducting product costs.

"We are not confident in our projections in this part of Adtran's business, and as a result we have made what we regard as deep reductions in our projections for next year," Pluckhahn wrote in a research note issued Monday morning. "We think the weakness in enterprise sales is external to Adtran; the company does not appear to be suffering market share declines but rather is feeling the impact of a slowing economy in general and a weak technology sector in particular."

Chase H&Q analysts expected fourth-quarter revenue to be $135 million and earnings per share to be 55 cents--far greater than the $110 million revenue and 16 cents earnings per share that the company conservatively predicted Friday. Analysts Michael Neiberg, Ilya Grozovsky and Don San Jose also expected the company to report a gross margin of 50 percent, but company executives cautioned that it will likely be in the 40 percent to 43 percent range.

Like many analysts, the Chase H&Q trio was not satisfied with management's explanation for the shortfall.

"We are a bit puzzled by the slowdown in Adtran's enterprise business, given that Cisco Systems recently reported a 20 percent sequential improvement in enterprise sales during its fiscal first quarter," they wrote in a research note issued Friday, in which they downgraded the company from "strong buy" to "market perform." "Adtran management maintains that it has not seen any market share losses and attributes the decline to short-term concerns, which it hopes to overcome through continued product development."