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Adtran 25% revenue hiccup on single tier 1 deal – Is this AT&T? Well actually no

US broadband equipment supplier Adtran tried to hide disappointing news of a downward trend in trading to the “graveyard” slot between Christmas and the New Year.

It said that its likely revenue for Q4 would be closer to $125 million than its Q3 result which was $185 million and its earlier guidance for Q4 of $161.3 million, almost a $40 million shortfall. Investors will be shocked by the 25% miss, and are likely to run for the hills. Its share price fell 12% on the news, which has to constitute a let off – there may be more falls to come.

Adtran said that non-GAAP earnings would be miniscule and that a full GAAP calculation would lead to a loss of around $0.04 per share. More troubling, it suggests that Q1 2018 will be more of the same, at around the same revenue level.

Adtran puts its dilemma fairly and squarely at the door of a tier 1 customer which has stopped spending due to a merger related review – our guess would be this is AT&T which may have slammed the brakes on after the Department of Justice put up objections to its acquisition of Time Warner. Our friends at Raymond James say not, and point to prior details showing 24% of revenue for Adtran coming from CenturyLink, which is waiting on clearance for Level 3. The means that things have the ability to shift back to normal, but what is normal at Adtran. It has Deutsche Bank in Germany as a dominant customer, and AT&T does not show up among customers which take 10% or more, but it must be close to that number. So when AT&T and Time Warner starts to slow spending as well there could be further impact.

AT&T has always had this ridiculous habit of ceasing all capex spend when it cannot get its way, and throwing its toys out of the pram and threatening the government of the day. It did much the same in 2007 to ensure that if it built out fiber or faster broadband, it did not have to share it with unbundlers. But CenturyLink is merely stretched financially and has no way of knowing where to spend its money until after the merger.

Our assessment of AT&T spending is that it has signed a consent decree to develop broadband in conjunction with its DirecTV deal, and will have to honor it, and that it has already ceded the US broadband market to a combination of Comcast and Charter and it cannot afford to waste any more time under-investing in fixed broadband. It has 3, if not 4, concurrent fixed broadband strategies in mind, G.Fast over twisted pair, G.fast over coax, fiber and fixed wireless 5G, and they are all in play right now. So as long as Adtran can get a piece of this, the future could look rosy.

The Adtran CEO Tom Stanton said, “Our performance this quarter has been significantly impacted by a merger-related review and slowdown in the spending at a domestic Tier 1 customer. Our current understanding is that this review will be completed in 60 to 90 days, at which time capital plans will be finalized. Going forward, recent awards and trials in Tier 1 customer accounts, both domestically and abroad, leave us very confident about our positioning.”

The big problem for Adtran shareholders is that it finds itself in this position on both sides of the Atlantic with Deutsche Telekom its other big tier 1 on that continent, where it is similarly vulnerable – it needs to scale up, perhaps with another acquisition, to make these customers less significant – but of course not until its share price recovers from this hiccup.

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