Tuesday, September 25, 2007

Adtran's woes probably signals deeper issues in telecom

ADTN officially announced on Friday at 5pm (pacific time that is!- yea I was in the office) that it will fall short of expectations for the September quarter. Nothing wrong with pre-annoucing 4 hours the market closed on a Friday I suppose. Company blamed their legacy business for the shortfall and basically blamed absence of spending typical for Q3 for the shortfall. ADTN is notorious for having "book and ship" business where they typically have very little booked business going into any quarter and that usually means the company has no idea how the quarter will shape up usually. The other notorious company with such luck in telecom is TLAB.

So what do we think this means for telecom, probably nothing more than that T is acting like any large telecom and it really wants to improve its inventory levels. Probably a good thing since with such a large debt balance and with traditional wireline business going no where but down T must start managing its cash flow better. With GOOG upcoming wireless phone service its going to be tough for telecoms to make money in the one area they have protected so far- wireless. As you might have seen in ads for T, the focus is totally on wireless business. You could not imagine T would have offered naked DSL few years back with wireless service but to protect the wireless subscriber base T is pulling all the stops. The question now is not if wireless will be able to save the franchise the question is how long can wireless support legacy before offerings from GOOG or other ad-supported models take over wireless cash flow. The trouble T and VZ have fighting the MSOs only complicates this situation. This probably spells trouble for many suppliers down stream over time as well hence the consolidation in telecom equipment space will continue. I believe investing in the "arms dealers" makes sense to some extent but remember you can only survive arms to the survivors - fewer survivors does no one good.

Also, the bad miss by ADTN probably means other T suppliers will feel some pain also- list includes - TLAB, ADCT, ALU, CIEN, CTV. But doesn't necessarily mean they will miss like ADTN, since ADTN accounted T for 24% of revenues in June quarter. The only other vendor with such large exposure is CIEN with 26% of revenues coming from T in most recent quarter, but CIEN supplies different set of tools for different part of the network for T.


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