ADC's Bob Switz on Telecom Growth and Commodity Pressure

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ADC's Bob Switz on Telecom Growth and Commodity Pressure

ADC Telecommunications CEO Bob Switz appeared on CNBC this afternoon explaining his company's guidance for the full year is to be maintained. It would appear he was referring to revenue and not earnings. He also explained six weeks ago guidance was lowered. He further mentioned at the end of the second quarter, guidance was raised.

Yesterday, the company reported quarterly earnings. Apparently commodity and freight costs are to blame for pressure on earnings.

Here are the highlights from the report:

  • Net Sales of $390 Million, Up 13% from 3Q07;
  • Sales Outside the U.S. of $173 Million, Up 32% from 3Q07;
  • $0.12 GAAP EPS In 3Q08, Which Includes Certain Expenses Totaling $0.15 EPS;
  • Cash Flow Provided by Operating Activities of $56 Million in 3Q08 and $159 Million in Last 12 Months;
  • 2008 Annual Sales Guidance of $1.500-$1.520 Billion, Up 13%-15% from 2007 and a 22-23% Five-year Compound Annual Growth Rate Since 2003
ADC Telecom is certainly one of the more diversified telecom companies playing in cable, copper connectivity, Ethernet, fiber, SONET, power distribution, wireless and more.

Going forward, Switz says they have a competitive transformation platform which will lower manufacturing costs. This should help offset rising prices he says and in addition the company will pass along some of the increased costs to customers through surcharges.

Regarding the global economy, Switz says 44% of their business is outside the US and since Europe has done well (up 28%) and Asia PAC is up 52% he is optimistic. Finally he mentioned he hasn't seen recessionary effects slow the telecom business as of yet.

Here is more on how the company is doing as referenced in yesterday's quarterly earnings press release:

ADC's sales for the third quarter of 2008 were $390 million, up 13% from the third quarter of 2007 and down 3% from the second quarter of 2008. Excluding sales from the LGC Wireless and Century Man Communication acquisitions of $36 million and $35 million in the third and second quarters of 2008, respectively, adjusted sales in the third quarter of 2008 were up 3% from the third quarter of 2007 and down 4% from the second quarter of 2008.

Sales outside the United States of $173 million increased 32% from the third quarter of 2007 and 3% from the second quarter of 2008. These sales were 44% of total ADC sales in the third quarter of 2008, an increase from 42% and 38% in the second quarter of 2008 and the third quarter of 2007, respectively. Comparing the third quarters of 2008 and 2007, Europe/Middle East/Africa sales of $91 million were up 28%, Asia Pacific sales of $54 million were up 52% and Latin America sales of $18 million were up 53%. Comparing the third quarter of 2008 to the second quarter of 2008, Europe/Middle East/Africa sales were approximately flat, Asia Pacific sales were up 8% and Latin America sales were up 11%. The remaining sales outside the United States were in Canada.

Global Connectivity Solutions (GCS)

GCS sales of $293 million in the third quarter of 2008 increased 9% from $268 million in the same quarter in 2007. GCS generated a 7% increase in sales of global fiber connectivity solutions due to growth in central office, data center and outside plant deployments. Customers worldwide are building and deploying fiber network solutions to increase network speed and capacity. The increase in fiber sales was accompanied by a 15% increase in global copper connectivity shipments and a 4% increase in sales of global enterprise connectivity products. Global copper connectivity sales in the third quarter of 2008 and the nine months ended August 1, 2008 included $10 million and $20 million, respectively, as a result of the Century Man acquisition that closed during January 2008. Excluding the Century Man acquisition, the increase in global copper connectivity sales was primarily in other emerging world markets. Global enterprise connectivity sales grew primarily in the Asia/Pacific region.

GCS sales in the third quarter of 2008 decreased 2% from $298 million in the second quarter of 2008. Sales of global fiber connectivity products decreased 14% primarily due to lower sales of central office and data center products and to a smaller degree from lower sales of outside plant products. Sequentially, third quarter 2008 sales of global copper connectivity products increased 6%, while enterprise connectivity product sales increased 8%. Global copper connectivity sales in the third and second quarters of 2008 included sales of $10 million and $8 million, respectively, as a result of the Century Man acquisition. Excluding the Century Man acquisition, global copper connectivity sales increased primarily in other emerging world markets. Global enterprise connectivity sales grew primarily in the Asia/Pacific and Americas regions.

Network Solutions

Network Solutions' wireless sales of $32 million in the third quarter of 2008 nearly tripled from $11 million in the same quarter in 2007, but declined 8% compared to the second quarter of 2008. Wireless sales in the third quarter of 2008, the second quarter of 2008 and the nine months ended August 1, 2008 included $25 million, $27 million and $75 million, respectively, as a result of the LGC Wireless acquisition that closed in December 2007.

Network Solutions' wireline sales of $12 million in the third quarter of 2008 compared to $13 million in the same quarter in 2007 and $12 million in the second quarter of 2008. Wireline product sales are impacted by a long-term, industry-wide product substitution trend resulting in a decline in market demand for high-bit-rate digital subscriber line products as carriers deliver fiber and Internet Protocol services closer to end-user premises.

Professional Services

Professional Services' third quarter 2008 sales of $54 million were approximately flat compared to the same quarter in 2007. Third quarter 2008 sales were 7% lower than the second quarter of 2008 due largely to project timing and a decision not to renew unprofitable business in Europe.

2008 Guidance

On a continuing operations basis, ADC currently expects its 2008 sales to be in the range of $1.500-$1.520 billion, an increase of 13%-15% compared to 2007 and a 22-23% five-year compound annual growth rate since 2003. This guidance includes the results of the LGC Wireless and Century Man acquisitions that closed in the first quarter of 2008.

Based on our 2008 third quarter sales, ADC now expects fourth quarter 2008 sales to be lower than third quarter 2008 as customers' capital spending nears the end of the calendar year. For full year 2008, gross margins are expected to be around 35%; however, they are expected to rise and decline with sales volume levels and mix from quarter to quarter. Looking ahead and generally consistent with its historical seasonality, ADC anticipates that sales in the first quarter of 2009 will be lower than the fourth quarter of 2008. Sequential sales declines from the prior-year fourth quarter were 7% and 3% and in the first quarters of 2006 and 2007, respectively. Excluding the Century Man and LGC Wireless acquisitions that closed in the first quarter of 2008, sales in the first quarter of 2008 decreased 5% from the fourth quarter of 2007. ADC will provide annual financial guidance for 2009 when it reports in December 2008 its fourth quarter results for the period ending October 31, 2008.

 



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