ADTRAN Initiated as Neutral

We are initiating coverage on ADTRAN Inc. (ADTN) with a Neutral rating. Currently, the stock has a Zacks #2 Rank (Buy).

We believe ADTRAN is benefiting from several new product cycles in broadband access, fiber to the node, Ethernet over copper, optical and enterprise VoIP. The increasing adoption of the TA5000 platform has resulted in incremental market opportunities and share gains that are likely to continue in future. However, competitive pressure, regulatory environment, higher credit risk and customer concentration make us cautious on the stock.

We believe the company’s rich balance sheet, policy of returning cash to shareholders, several broadband upgrades, access product lines such as the TA5000 platform, 1100 and 1200 series products and wireless backhaul products make it attractive for investors. ADTRAN is poised to benefit from the broadband stimulus package given the company’s exposure to North America and leadership position in broadband access technologies.

The company’s second quarter earnings surpassed the Zacks Consensus Estimate and the year-ago quarter, based on strong revenues. The three main generators of growth at ADTRAN are Carrier Systems, Business Networking and Loop Access. All these products achieved record breaking revenues in the reported quarter. ADTRAN is currently reaping profits from the demand for wireless backhaul products, which is reflected in its High bit-rate Digital Subscriber Line (HDSL) and OPTI-6100 product lines.

ADTRAN has sub-categories of product revenues, which are further divided into growth products, representing its primary growth areas and traditional products. The company’s growth products consist of Broadband Access, Optical Access products (both included in Carrier Systems) and Internetworking products (included in Business Networking). Traditional products include HDSL products (included in Loop Access) and other products. We believe Broadband Access and Internetworking products will drive revenues going forward, resulting in strong earnings growth.

However, we are largely concerned about customer concentration particularly at Qwest Communications Inc. (Q – Analyst Report) as the Qwest-CenturyLink (CTL) merger could lead to share losses affecting the company’s overall revenues. Customers such as AT&T Inc. (T), Verizon Communication (VZ), Embarq Corp. (EQ) and Qwest generate a major portion of the company’s revenue. Any reduction or loss in business from these customers could negatively impact revenue growth thereby restricting the company’s profitability.

Based in Huntsville, Alabama, ADTRAN Inc. designs, manufactures, markets and services network access solutions for communication networks. The company develops, markets and supports high-speed network access solutions for use across Internet protocol (IP), asynchronous transfer mode (ATM) and time division multiplexed (TDM) architectures in both wireline and wireless network applications.

ADTRAN maintains two operating divisions based on its products and services: the Carrier Networks Division and the Enterprise Networks Division.

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