ADTRAN Faces Trifecta for U.S. Growth

March 04, 2015
By: Doug Mohney

Two recent major events are likely to turn into solid sales numbers for ADTRAN (News - Alert) over the next couple of years, while a third will continue to deliver steady returns. Frontier, municipal broadband, and the Federal Communication Commission's (FCC (News - Alert)) ongoing agenda to promote broadband in rural and urban underserved/unserved areas will all boost ADTRAN's bottom line.

ADTRAN didn't have a great fourth quarter in 2014, with revenues falling and sales declining across the board when it reported numbers back in January, but the demand for more broadband isn't going away, nor is the need for fiber, and copper still has a key role to play because you can't install fiber everywhere overnight. 

Frontier Communications and ADTRAN have been longtime buddies. Frontier has been steadily picking up Verizon wireline properties over several years and its latest transaction in February added operations in California, Florida and Texas with 3.7 million voice connections, 2.2 million high-speed data customers, and about 11,000 Verizon employees switching payrolls. Unlike AT&T (News - Alert) and Verizon, Frontier can live with extended FCC Title II-style regulation on broadband, so it is prepared to continue to invest in wireline network without crying about regulatory uncertainty.

Fiber is a big part of Frontier's game plan, with the company actually investing in new community fiber deployments—something Verizon (News - Alert) stopped doing years ago. A few weeks ago, Frontier announced it had completed the first phase of upgrades in Eastern Washington and North Idaho. It is also conducting gigabit service deployments in Durham, North Carolina and Portland Oregon. 

When the smoke clears, Frontier is doing quite a bit of fiber-to-the-home work along with leveraging existing copper plant that Verizon did nothing with over the past few years. There's a lot of new build and upgrade business that will come from Frontier and ADTRAN's position in both fiber and copper gigabit technologies.

The FCC action on municipal broadband will open up new markets and opportunities for ADTRAN. A number of municipalities have wanted to provide broadband services since the local monopolies have not stepped in, or otherwise have been unable to provide high-speed internet. Various state laws have been erected as impediments for local governments to get into the broadband business. The FCC ruling will enable local government to start and expand broadband projects.

In addition, ADTRAN is a big supporter of government efforts to expand broadband investment in unserved and underserved areas. The FCC's rural broadband fund has about $100 million in seed money to spin up high-speed projects and there's an additional $7.2 billion in loans, grant money and loan guarantees by the Departments of Commerce and Agriculture. That's a lot of money to fuel greenfield infrastructure projects.

Arguments abound that the FCC move to regulate broadband services as a utility will decrease capital investment in infrastructure. It has been Verizon's battle cry against tighter regulation under Title II. Against this position, New Network Institute says Verizon has run a "massive financial shell game" using existing Title II regulation to support fiber deployment, but using the infrastructure to support non-Title II covered services, such as wireless and cable TV offerings.  

It's difficult to figure out how much of an impact new FCC regulation will have; for one thing, the full documentation hasn't been published yet. However, if Verizon is shedding territories that it doesn't think will be profitable under new regulation while Frontier picks up those properties and invests in them, is that a net gain or loss for ADTRAN and other telecommunications equipment providers?  I suspect that ADTRAN gets a net gain, since Verizon hasn't been investing in those territories.

Edited by Dominick Sorrentino