Earlier this year, Gartner estimated that global telecom spending in 2014 will be better than last year. However, telecom gear maker ADTRAN's (NASDAQ: ADTN ) performance speaks otherwise. ADTRAN has struggled to gain traction in the domestic telecom market so far this year. Its shares are down around 16% in 2014, close to its 52-week low. This looks surprising, given that ADTRAN is well-placed at AT&T (NYSE: T ) to benefit from Ma Bell's infrastructure upgrades, while Google's (NASDAQ: GOOG ) (NASDAQ: GOOGL ) fiber roll out could be another tailwind.
Not too bad
When the company released its second-quarter results, it disappointed investors once again. ADTRAN said that is has experienced a delay in a project with a Tier 1 customer in the U.S. It now expects meaningful revenue from this customer from the first quarter of fiscal 2015, and had to adjust its fiscal 2014 guidance to reflect this.
On the positive side, ADTRAN beat consensus estimates in the second quarter. Its top line improved around 9% from last year, while operating income jumped an impressive 38% year over year. Adjusted earnings came in at $0.30 per share, significantly better than last year's $0.21 per share. This is a robust performance despite the weakness that ADTRAN is seeing in the U.S.
An improving situation
Strength in the international business and the adoption of its broadband access products have helped ADTRAN overcome the sluggishness in U.S. telecom spending. The company recently rolled out its next-generation broadband products in Europe to positive response from several carriers. ADTRAN also added two key customers -- one in Latin America and the other in the Middle East -- and expects the momentum to continue as carriers continue deploying next-generation broadband products.
ADTRAN is also gaining some traction in the U.S. In the second quarter, the company extended its multi-year agreements in the broadband segment with several Tier 2 carriers. This was the result of the FCC's Connect America Fund (CAF), which is laying emphasis on broadband growth and provides increased funding in the second phase of implementation. As CAF adoption increases, it is expected that telecom spending in the U.S. will continue getting better and boost ADTRAN's prospects.
The company's new products are gaining traction in the U.S. as well. For example, its new Gig-E services were selected by domestic Tier 2 carriers. ADTRAN's access optical and service solutions, along with business hosted voice solutions, are also picking up. Looking ahead, the company expects acceleration in the deployment of next-generation access technologies worldwide to act as a tailwind.
The fiber fight can be a boon
The increasing adoption of fiber-optic networks will be another catalyst for ADTRAN going forward. According to Raymond James & Associates, as ADTRAN is favorably exposed to broadband, it might profit from the AT&T-Google fiber fight. Raymond James points out that ADTRAN is "an approved secondary supplier to AT&T for consumer broadband," which means that it should eventually benefit from AT&T's latest initiative of deploying fiber-optic services on a large scale in the U.S.
In April, AT&T laid out its plan of rolling out fiber-optic services to 100 cities and municipalities in the U.S. Ma Bell will provide speeds of up to 1 Gigabit per second to 21 new metro areas. This move from AT&T is likely in response to Google's fiber initiatives.
According to Google, its fiber service is a 100 times faster when compared to the average broadband service. The technology giant has recognized nine metro areas in the U.S., according to Ars Technica, to deploy its Google Fiber service. Google is in negotiations with 34 cities across the targeted nine metro areas to deploy the fiber-optic network.
As Google is moving into the territory of carriers and cable companies with its Internet services, the likes of AT&T will look to defend their turf with their own fiber services. In the long run, this should ideally create demand for ADTRAN's broadband products, and improve its performance in the U.S.
The bottom line
Domestic telecom spending is holding ADTRAN back, while the company's international business is progressing well. But, there's a good probability that the domestic business will bounce back going forward and help ADTRAN report stronger growth. Till then, investors should continue holding the stock in their portfolios and take home ADTRAN's strong dividend of 1.60%.
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