Argus Downgrades Adtran After 'Weak' Q1

Telecom equipment provider ADTRAN, Inc. ADTN issued a "weak" guidance first-quarter print Tuesday, according to Argus, prompting a downgrade from the research firm. 

The Analyst

Argus analyst Jim Kelleher downgraded Adtran from Buy to Hold with no assigned price target.

The Thesis

Adtran's Q1 report is notable for a 29-percent decline in revenue from the prior year to $120.8 million, Kelleher said in the Thursday downgrade note.

The reported revenue was also "well below" consensus estimates of $127 million and can be attributed to poor demand from an unnamed Tier 1 North American carrier customer, the analyst said.

The client — most likely Centurylink Inc CTL — is in the process of overseeing a strategic review of its vendors, and while Adtran is optimistic the client revenue will return in the bottom half of 2018, it implies that more weak top-line and margin performance is likely in the second quarter, Kelleher said.  

The industry serviced by Adtran remains in a "low-investment mode" ahead of an anticipated 5G launch in 2019 or 2020, the analyst said. The company's inability to increase revenue among its installed base implies that its service revenue is declining at a faster rate than its hardware business, Kelleher said. The company is "being starved" of the volume leverage it needs to sustain margins, he said. 

Kelleher said his prior bullish stance on Adtran was based on expectations for sustainable momentum in ultra-broadband sales and growing services revenue. It is now apparent that both of these potential catalysts have "blown up," and a return to EPS growth looks "increasingly distant," the analyst said. 

Price Action

Adtran shares were down 1 percent at the time of publication Thursday at $14.80.

Related Links:

Here's Why Goldman Upgraded Adtran Despite Near-Term Risks

Benzinga's Top Upgrades, Downgrades For April 19, 2018