Over the last three decades, there has not been a more respected telecommunications equipment vendor than ADTRAN. Historically, its success was mainly predicated on taking a step or two backward to find opportunities with mature technology in order to build better “mousetraps,” with innovative architectural designs, which allowed for plenty of room to go down the cost curve, and removed a lot of unneeded bells and whistles that were not required by many of its customers. Nevertheless, starting around the middle of 2009, ADTRAN’s management evidently began the gradual process of transitioning from a humble “supplier of networking and communications products,” which was able to avoid a lot of competitive threats because the bigger manufacturers had always moved on to the next big thing, to a riskier, “leading provider of next-generation networking solutions,” directly taking on the large players – resulting in less impressive financial results.
ADTRAN’s gross margins have more or less been steadily dropping from right near 60% from 2005-2010 to approaching 40% today. Its operating margin downfall has been even more precipitous – around 22% in 2009 compared to well below 2% now. Although ADTRAN’s revenues have increased appreciably, including in picking up NSN’s fixed line broadband access business, as with all acquisitions, there are unpleasant surprises, such as in this case, higher services related costs. (The other obvious potential problem is that these products are not necessarily even close to being engineered in as modular a way to a “pay as you go,” approach, as say ADTRAN’s Total Access systems.)
In reading between the lines of a recent Light Reading article, ADTRAN is caught in the undesirable middle between its traditional desire to be “pragmatic” and its non-traditional approach of being “first to market with a solution.” Yet, again, the practical nature of its initial business model was rooted in redesigning mature types of gear, and so there would have been in the past, an avoidance of “some very big developments with very big carriers.” In addition, all of the expense involved in losing the battle with a giant player, Alcatel-Lucent, earlier this year for a huge chunk of AT&T’s business would have been circumvented.
There are other costs involved in ADTRAN taking a lead role in new technology. For its G.fast solution, the company was maintaining about 30 field trials a few months ago. In contrast, Calix, its major competitor for access networks, has been able to take advantage of customer feedback on these next-gen passive systems from operators (which it only could have received from such tests) to determine that there is actually a business case for that solution, and has only this past June announced its own products.
While ADTRAN’s six-year experiment has not been extremely harmful to the firm, we believe the handwriting is on the wall. The supplier needs to reverse course and slowly move back to the game plan that has been intrinsically part of its corporate DNA. Otherwise, it is hard to see that it has any chance to get back to its superb financial performances of the past.
[written by Mark Lutkowitz]