Tomorrow, telecommunications equipment maker and S&P 500 component ADC Telecom (NASDAQ:ADCT) will report earnings for Q4 and the full fiscal year of 2006. Let's patch into ADC's panel to see how well the networks are running these days.

What analysts say:

  • Buy, sell, or waffle? You'd expect decent coverage for an S&P 500 stock, and ADC delivers, with 23 analysts following the company. Eight of them rate the stock a buy, and the other 15 are holding. In our Motley Fool CAPS investor community, it is but a one-star stock.

  • Revenues. Sales for the quarter should land at $303 million, according to the average analyst forecast. That's a 0.5% year-over-year gain -- essentially flat.

  • Earnings. Wall Street expects earnings to hold steady year over year at $0.18 per share.

What management says:
In the latest earnings release, management sounded cautiously upbeat about its business prospects. "While we expect our results to fluctuate from quarter to quarter, we believe carrier consolidation, wireline/wireless convergence, subscriber retention/growth, and network evolution to Internet protocol communications services create strong long-term potential for ADC's solutions to connect our customers' next-generation wireless, broadband, video, data and voice services," said CEO Robert E. Switz in an especially verbose sentence. "The strategic fundamentals of our business remain solid, and we remain confident that we can deliver long-term growth and profitability."

What management does:
Recent results justify the cautious part of the above statement. Rolling margins are dropping steadily across the board, while revenue growth is slowing down. Not a great combination.

Margins %

4/05

7/05

10/05

1/06

4/06

7/06

Gross

37.9

38.0

36.0

35.1

33.7

32.4

Operating

6.6

9.1

7.5

7.0

6.3

5.7

Net

12.9

15.4

9.5

4.7

3.6

2.5

Y-O-Y Revenue Growth

78.9

71.5

51.2

38.0

24.7

18.8
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
With those margin trends in mind, the failed attempt to merge with rival Andrew (NASDAQ:ANDW) makes sense. That company seems to know how to keep its margins steady, albeit at lower levels than what ADC is producing.

It's not that ADC isn't trying hard, either. Just weeks after the Q3 earnings report and those guardedly optimistic statements quoted above, management announced that it is closing two unnamed facilities, cutting 225 jobs, and spending $10 million to $12 million on that restructuring. It's part of a cost-control program, according to the announcement.

But $12 million happens to be the average annual restructuring expense over the past three years. That makes me wonder whether the cuts are having the desired effect. I used to work for a company in the habit of introducing sweeping reorganizations, bold job cuts, and buzzword-loaded management programs on a yearly basis -- all while dealing with merger fallout, dropping revenues, and inconsistent earnings. Judging from the numbers at ADC, the same thing could be happening there.

ADC is hoping for an influx of business from fiber-optic communications initiatives across the telecom industry, and the occasional municipal wireless-network installation. AT&T (NYSE:T) and Verizon (NYSE:VZ) both have ambitious designs on rolling out fiber to the curb, and both are on ADC's client list. We'll just have to wait and see when the orders start coming in.

Competitors:

  • Corning (NYSE:GLW)
  • 3M (NYSE:MMM)
  • Tyco (NYSE:TYC)

3M and Tyco are two of theInside Valuenewsletter service's active recommendations. Find more great businesses on sale with a free, 30-day trial.

AT&T is a former Motley Fool Stock Advisor pick.

Fool contributorAnders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdingsif you like. Foolishdisclosureis always a good decision.