Turnarounds are hard, and not many managers or investors are up to the challenge. But when they work out, the rewards can be considerable. Here's hoping, then, that ADCTelecommunications
Third-quarter results appear to me to be a mixed bag. The company appears to be succeeding in its effort to slim down and morph from a broad-line equipment supplier to a much more focused provider of infrastructure connectivity equipment and technology. But management's earnings guidance suggested that the market still isn't what it used to be -- a revelation that shaved off about 10% of the stock's value.
For the quarter, revenue was up about 40% annually and 1% sequentially. ADC's OmniReach FTTX (fiber to the "x") business posted growth in excess of 400%, while the Digivance business (which sells products to expand network capacity) clocked in with 176% growth. Offsetting this somewhat, wireline access system sales fell by 14% for the period.
Because the company reported minuscule operating profit last year, the annual comparisons aren't especially informative. That said, ADC's operating margin of 10.5% was a sequential improvement and doesn't compare too shabbily to others in the still-recovering communications equipment industry like Lucent
Likewise, the free cash flow picture is mixed. The company is once again positive on an operating cash flow basis, but not quite so on a free cash flow basis -- unless, that is, you include the benefit of disposals of property and equipment (something that most people exclude from their free cash flow calculations).
Were I already an owner of these shares, I wouldn't get too bent out of shape about guidance. Turn-arounds are tricky work, and I wouldn't say that ADC's markets are really back on a solid growth trend just yet, despite projects from large telcos like Verizon
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
