ADTRAN Management Discusses Q2 2012 Results - Earnings Call Transcript


Q2 2012 Earnings Call

July 11, 2012 10:30 am ET


Thomas R. Stanton - Chairman of the Board and Chief Executive Officer

James E. Matthews - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance, Treasurer, Secretary and Executive Director


Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division

Jim Suva - Citigroup Inc, Research Division

Michael Genovese - MKM Partners LLC, Research Division

Mark McKechnie - ThinkEquity LLC, Research Division

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Ehud Gelblum - Morgan Stanley, Research Division

Richard Valera - Needham & Company, LLC, Research Division

Jonathan Kees - Capstone Investments, Research Division

Eric A. Ghernati - BofA Merrill Lynch, Research Division

Jeffrey T. Kvaal - Barclays Capital, Research Division

Blair King - Avondale Partners, LLC, Research Division



Ladies and gentlemen, thank you for standing by, and welcome to the ADTRAN's Second Quarter 2012 Earnings Release Conference Call. [Operator Instructions] During the course of the conference call, ADTRAN representatives expect to make forward-looking statements, which reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainty, including the successful development and market acceptance of core products, the degree of competition in the market for such products, the product and channel mix, component costs, manufacturing efficiencies and other risks detailed in our Annual Report on Form 10-K for the year ended December 31, 2011, and Form 10-Q for the quarter ended March 31, 2012. These risks and uncertainties could cause actual results to differ materially from those in forward-looking statements, which may be made during the call.

It's now my pleasure to turn the conference over to Mr. Tom Stanton, Chief Executive Officer of ADTRAN. Please go ahead, sir.

Thomas R. Stanton

Thank you for joining as for our second quarter 2012 conference call. With me this morning is Jim Matthews, Senior Vice President and Chief Financial Officer. I'd like to begin this morning by discussing some details on our Q2 results, including our thoughts on the spending environment and its impact on our near-term outlook.

As you can derive from our press release issued last night, the spending environment in the markets we address deteriorated in the second quarter, with the most significant changes affecting our domestic Tier 1 carrier customers and several areas served by our Enterprise products division.

During the quarter, we achieved revenues of $184 million, and if we exclude our recently acquired NSN BBA business, revenues were $161.4 million. The $161.4 million represents a sequential increase of 19.8% for our organic business but a year-over-year decrease of 12.4%. Our acquired business came in at $22.6 million in range with our expectations. In total, our CN division had organic revenues of $130.1 million, again, in line with our expectations.

During the quarter, we saw the expected acceleration of our Tier 1 Fiber-to-the-Node build-out and the resumption of planned activities in the Tier 2 and Tier 3 markets. However, we experienced a heightened sense of consciousness and budget uncertainty with both large and small carriers, which resulted in project delays and an uneven order flow.

We are confident that our market position remains strong with no meaningful market share loss, where we have incumbency, and we continue to add new customers at a rate consistent with our performance over the last 2 years. The macro environment impacted our Enterprise division, and more importantly, our Internetworking products, which grew 6% year-over-year, the smallest increase since the first quarter of 2009. The impact was felt across nearly all product areas with the exception of our virtual wireless LAN segment, which continued to build strength with both resellers and carriers. From a channel perspective, only our reseller base showed growth, a likely result of our increasing focus in this area.

Looking at our business from a product segment perspective, our organic Broadband Access segment was up both sequentially and year-over-year, driven by our Fiber-to-the-Node platforms as we saw meaningful increases in shipments to a domestic Tier 1 carrier, coupled with a strong performance in Latin America. This area also helped by a strong performance by the Total Access 5000 platform in the Tier 2 and Tier 3 markets, where we continue to add in excess of 20 new carrier customers per quarter.

Our Optical business was impacted by the slower Tier 1 sales, although it was partially offset by an increase of our newly released ONE product line. Also during the quarter, we received approvals from 2 additional Tier 2 carriers for our ONE products and began initial shipments to 1 of those 2.

Looking at our business from a geographic perspective, U.S. sales were down 19% year-over-year for the quarter, driven predominantly

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products to Tier 1 carrier customers.

As most of you know, who follow the company, the decline in these product areas has been expected, and we continue to drive the focus of the company towards packet-based technologies.

Conversely, it is important to note that total international revenues represented nearly 30% of the total company revenue, and our organic international revenues grew 32% year-over-year as we continued our global -- or goal of geographic and customer diversification.

We closed on the NSN Broadband Access business on May 4 this year, and I'm pleased to report we remain on track with our integration activities. During the quarter, we successfully on-boarded the required personnel, negotiated terms of supply agreements with all the major vendors and began production of selected products using ADTRAN's supply chain. It is our belief that in the years to come, ADTRAN's growth will be influenced by our ability to expand our geographic presence and our relevance with Tier 1 carriers around the world. This business, with its entrenched incumbency at large carriers outside of North America, will without a doubt substantially accelerate our initiatives and increase our odds for long-term success.

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