Suppliers of telecom and networking equipment and components have performed well this year as carrier spending has remained strong. The likes of Ciena (NYSE:CIEN) and Finisar have turned in impressive quarterly reports and investors have enjoyed sizable gains. However, not all companies have benefited from an increase in telco spending equally. ADTRAN (NASDAQ:ADTN) is one of them.
An uninspiring outlook
ADTRAN has struggled to grow revenue and still trades at an expensive 39 times earnings. Its recent fourth-quarter report didn't do much to inspire investors' confidence, which had been on a high so far this year after management promised better times lie ahead.
ADTRAN shares fell after management stated that revenue is expected to decline sequentially in high single-digits to low teens in the ongoing quarter. Analysts were expecting around $165 million in revenue, which would have translated into a 7% sequential drop.
Some positives to consider
However, there were a few positive takeaways in the quarterly report that deserve a look as they might help improve ADTRAN's business in the future. First, the company is witnessing decent growth in its European business, driven by a recent Tier 1 customer win. In addition, ADTRAN's enterprise business continued to perform strongly and revenue in this segment grew 20% from the year-ago period.
However, ADTRAN is unsure of how the order pattern of its major European customer -- which is probably Deutsche Telekom -- would be like in the ongoing quarter. This probably led ADTRAN to issue a cautious outlook. Apart from this hiccup, ADTRAN did witness certain positive developments. The company's hosted voice over IP service saw an initial launch by a Tier 1 carrier in the U.S., while its Wi-Fi solution was chosen by a Tier 2 carrier for hotspot deployment.
ADTRAN has been aggressively strengthening its sales channel by bringing more value-added resellers into its fold, with the company adding 100 more such resellers in the previous quarter. Such an initiative should help ADTRAN increase its sales going forward.
Moreover, the company remains optimistic about the telecom spending environment. Management stated that ADTRAN's major Tier 1 projects are moving forward as expected and the company has also began shipments for a particular product in the previous quarter.
ADTRAN expects to begin shipments to a major Tier 1 customer in the U.S. in mid-2014, which is probably AT&T (NYSE:T). ADTRAN, along with Ciena, had spiked late last year after AT&T announced that it would be boosting its capital expenditure. AT&T's LTE network already covers around 350 markets and the telco is closing in on Verizon's coverage of 500 markets.
AT&T plans to cover a total of 300 million people by its 4G network by the end of next year and ADTRAN would probably benefit from this initiative as it is a supplier. Overall, it looks like ADTRAN is being a bit cautious as of now, even though the end-market prospects look decent.
Other players in the industry are seeing good growth in orders. For instance, Ciena's orders in the previous quarter increased on a sequential basis and the company managed to achieve a record backlog. Ciena recorded design wins at a number of international Tier 1 customers and expects them to begin spending in the current quarter. Hence, ADTRAN might also report improvements when it begins shipments to its major customers and receives clarity from its European customer.
However, as mentioned earlier, with a trailing P/E ratio of 39, ADTRAN doesn't look like a good buy at current levels. The P/E has come down from an even loftier 54 times earlier this year and it might come down further as post-earnings negativity surrounds ADTRAN. Thus, even though the company's business could improve, investors should wait for a more reasonable valuation, or pullbacks, before initiating a long position.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.