Telecom slowdown hits ADC

ADC Telecommunications exceeds lowered earnings expectations for its first fiscal quarter but misses revenue targets.

3 min read
ADC Telecommunications exceeded lowered earnings expectations for its first fiscal quarter but also told investors that slower sales will affect the company's growth for year.

The telecommunications equipment maker said in a statement released after the markets closed that pro forma net income rose to $57 million, or 7 cents a share, on revenue of $805 million. That compares with earnings of $54 million, or 7 cents a share, on revenue of $594 million for the same quarter last year.

Wall Street expected the Minnetonka, Minn.-based company to earn 6 cents a share, the consensus estimate of 15 analysts surveyed by First Call. Ten analysts polled by First Call also expected the company to generate $844.3 million in revenue.

The company lowered its first-quarter forecast last month to between 5 cents and 7 cents a share. At the time, First Call's consensus estimate pegged ADC's earnings at 12 cents a share.

The pro forma numbers exclude items related to noncash stock compensation, nonrecurring charges and restructuring charges. Including the charges, the company reported a first-quarter net income of $2 million, or zero cents a share, vs. $53 million in the year-ago quarter.

The company acknowledged that a slowdown in spending by its telecom customers pinched ADC's financial performance during the quarter.

"As a result of a challenging economic and market environment in the United States, sales to domestic customers grew at a lower-than-expected rate of 26 percent and ADC's first-quarter earnings were affected by lower profit margins on sales," retiring ADC Chairman William Cadogan said in a statement.

ADC shares closed down 69 cents at $10.31. In after-hours trading, the company's shares were up 81 cents to $11.12 according to Island ECN, an electronic trading network.

"The environment, from a macro(economic) perspective, is certainly getting worse," said George Notter, a telecom analyst at Deutsche Banc. "ADC struggled with a number of excess inventories that they shipped to carriers last year."

During fiscal year 2000, which ended in October 2000, ADC increased revenue to $3.3 billion from $2.2 billion, an increase of 53 percent.

Notter believes that some of this growth was artificial. Last year telecom service providers were expanding their network capacity tremendously, and Notter says the companies purposely over-ordered parts from equipment makers like ADC just to make sure they would have them.

As the voice and data carriers elected to slow down spending and capacity build-up, they needed to order less parts from equipment makers, and also had stocked-up sizable inventory of parts as well, which they had to shave down.

"When we get comfort that the inventory situation in the carriers and the distributors is reduced, we can feel confident that ADC's business will reaccelerate again," Notter said.

ADC also announced that the sluggish environment will affect sales and lowered revenue targets for fiscal year 2001.

The company now expects revenue of $3.5 billion to $3.8 billion for fiscal 2001, which is an increase in a range of 6 percent to 15 percent. Last month, ADC told Wall Street that it expects revenue and pro forma earning growth of 15 percent for the year.

In today's release, the company stuck to its previous 15 percent earnings growth forecast for the year and expects 55 cents a share.