2023-06-01 11:46:06 ET
Summary
- ADTRAN Holdings has experienced a 50% decline in its share price over the past 12 months due to constrained profitability and ongoing supply chain problems.
- The company's 4% dividend yield may be at risk as negative earnings and cash flow continue, potentially leading to increased debt or balance sheet adjustments.
- The turnaround of ADTRAN's subscriber solutions segment is crucial for improving financials and avoiding further declines in the share price.
Intro
ADTRAN Holdings, Inc. ( ADTN ) provides services in the fiber optics space where it works with communications services players as well as public and private customers in the US as well as international markets. We wrote about this stock exactly 12 months ago when we stated that the company's bearish fundamentals (due to constrained profitability along with ongoing supply chain problems) were signaling that shares would indeed trade lower.
However, we did not foresee a decline to the magnitude of 50%+ over the past 12 months, as demand for ADTRAN's categories (including subscriber solutions) continued to be very strong 12 months ago. In fact, in Q1 last year, the company was growing its top-line sequentially and also reported 21% top-line growth over a rolling quarterly basis. Growth was evident in all of its segments, and bottom-line profitability was positive on a non-GAAP basis (EPS of $0.20 per share).
Fast-forward 12 months, however, and we see that the company's growth profile has changed significantly. Since we cannot go on rolling quarterly comparables in Q1 this year (as Q3-2022 was the first quarter that incorporated numbers from both ADTRAN & ADVA), it was still revealing that sales fell by almost 10% sequentially in the quarter. ADTRAN's non-GAAP loss came in at -$9.5 million for the quarter.
From delving through the report, we see that the fall-off in sales from the 'subscriber solutions' segment was the main culprit for the poor performance in the quarter. Furthermore, knowing when we get an uplift in this segment remains very difficult, as a change of sentiment would be needed among ADTRAN's customers regarding how much inventory they are willing to stock. The 'Access' & 'Optical' segments are expected to continue growing, but visibility regarding inventory remains very tough as market uncertainty continues to play a large role here.
The steep contraction in the share price has seen the dividend yield surpass 4%, the P/B ratio drop to 0.85 and the P/S ratio fall to 0.52. Demand for solutions in the fiber network space is expected to continue growing over time. Therefore, long-term investors may be looking at putting capital to work here in ADTRAN on the long side, especially when one considers the company's very attractive debt-to-equity ratio of 0.17.
Therefore, let's go through how healthy that 4% dividend yield is. Strength here would bode well for an eventual turn-around in shares of ADTRAN whereas a cut or suspension may lead to lower lows for the stock.
Pay-Out Ratio
We have to return to GAAP numbers and cash flow to see if the dividend is feasible at its present level. The dividend at present costs the company roughly $7 million a quarter and unfortunately, positive earnings or cash flow have not been able to be reported in recent quarters to meet this payment. Net GAAP profit comes in at -$35.4 million over the past four quarters, and operating cash flow also comes in negative at -$69 million over the same period. Although cash flow from investing initiatives has been contributing positively (through investments in marketable securities), debt has begun to be issued at the company, with approximately $69 million in net debt being issued in Q1 alone this year.
The worrying trend here from an investor's standpoint is that the longer ADTRAN continues to report negative core earnings and negative cash flow, the more likely it will have to continue raising cash through debt or turn to its balance sheet to raise cash. This is the problem with prioritizing the servicing of customers over anything else, in the sense that the financials will always suffer when large inventory numbers and expensive shipping costs become the norm in an uncertain economic environment.
Forward-Looking EPS Revisions
In fact, if we look at consensus expectations with respect to forward-looking profitability in ADTRAN, we see that bottom-line revisions continue to be dialed down in upcoming quarters, which is worrying, to say the least. Furthermore, the negative revisions are sizable in nature, which means ADTRAN's financials are expected to come under more pressure before long. Suffice it to say, in order to balance the books, rising debt looks to be the order of the day here unless the subscriber solutions segment can turn around quickly.
Conclusion
To sum up, shares of the new-look ADTRAN have had a desperate 12 months, with preliminary Q1 guidance announced in April being a further catalyst for the carnage in the share price we have seen. The absence of positive cash flow and reliance on elevated inventory numbers mean shares may remain depressed for some time to come here. We look forward to continued coverage.
For further details see:
Adtran: Things May Get Uglier Before A Final Bottom Is Confirmed