ADTRAN Holdings Inc (ADTN) 2002 Q1 法說會逐字稿

Good morning. My name is and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Adtran First Quarter Earning's Release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time simply press star, then the number one, on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key. Thank you.

During the course of this conference call Adtran representatives expect to make forward-looking statements which reflect management's best judgment based on factors currently known. However, these statements involve risks and , including the successful development and market acceptance of new products, the degree of competition in the market for such products, the product and channel mix, component cost, manufacturing efficiencies, and other risks detailed in our annual report on form 10-K for the year ended December 31, 2001. Such risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements, which may be made during this call.

Speaking on today's call from Adtran are Mr. Mark Smith, Chairman and Chief Executive Officer; Mr. Howard Thrailkill, President and Chief Operating Officer; and Mr. Jim Matthews, Senior Vice President and Chief Financial Officer.

Mr. , you may begin your conference.

Thank you, .

I would also like to welcome everyone to our first quarter conference call. I'm very, very proud of Adtran's continuing performance, especially during this difficult period in the data communications industry.

The current situation in data communications has been a -- a very difficult environment. It's been one of the worse environments that I have seen in both depth and the breadth in my 32 years in this business. However, Adtran has done a excellent job, especially all of the employees and all of the -- the people in their efforts during this time frame.

In that regard, our market share has continued to grow in most all of our product areas. We have numerous new product introduction that has improved our -- our competitive position. And our financial strength has continued to enhance our competitive advantage when we are comparing ourselves to our competitors, and we find ourselves in a -- in a competitive situation. We continue to be a -- continuing strong and ever growing strong concern in relationship to both our industry and the competitors that we see out there.

At this point I'd like to ask Jim Matthews, our Chief Financial Officer, to go over in detail the performance that we experienced during the first quarter.

Good morning, everyone. As -- as the in the press release, revenue for the fourth quarter was $83.3 million in and comprised the following, HDSLT1 was $45.1 million down from 53.6 million in Q1 of 2001 and down from 46.5 million in Q4 of 2001. Systems were $26.6 million in Q1, up from $24.3 million in Q1 2001, and up from $25.4 million in Q4 of 2001.

business transport total reach was 11.6 million in Q1, down from 27.3 million in Q1 of 2001, and down from 17.3 million in Q4 of 2001.

By market the revenue breakdown for the quarter was 64 percent per carrier and 36 percent for enterprise. The carrier enterprise percentages include their respective share of revenue from the international sector, which approximated 5.5 percent of the total.

Gross margin was 47.2 percent of revenue during the first quarter of 2002, compared to 44.8 percent for Q4 of 2001 and 43.2 percent for Q1 of 2001. The increase in gross margin is due to improve manufacturing efficiencies and reductions in cost across product lines.

Research and development expenses were $13.8 million in Q1, '02, compared to 14 million in Q4 of 2001. Selling, general, and administrative expenses were $20.8 million for Q1 2002, compared to $22.9 million for Q4 2001.

Other income, net of interest expense, was $1.3 million, which was consistent with the fourth quarter. The income tax break for the first quarter 2002 was 28 percent compared to 27 percent for the full year of 2001.

Earnings per share for Q1 2002 were 11 cents compared to 10 cents for the same period last year and 10 cents for the fourth quarter of 2001.

From a balance sheet perspective, we continue to build cash reserves and improve our working capital position. Inventories decline from 57 million dollars to $47 million during the quarter. DSO's came in at 60 days down from 63 days at December 31, 2001. This is on the lower end of our DSO guidance of 60 to 70 days.

Net cash provided by operating activities was $29 million for the three months, ended March 31, 2002. Cash and marketable securities net of debt totaled $234 million at March 31, 2002.

Now I would like to discuss guidance for the second quarter of 2002. Adtran does not carry significant amounts of backlog from quarter to quarter as we remain a booking ship business. In our analysis we see the business continuing to bounce along the bottom as difficult times linger in the markets we serve, but we continue to see inventories in the marketplace at very low levels. Considering these factors we are estimating revenue to be between 85 million and 90 million dollars for Q2 2002.

Our overall gross margin percentage for Q2 2002 should be in range with a gross margin percentage experience in Q1. Operating expenses should be in range with Q1.

Taking these factors into consideration, assuming a tax rate of 28 percent and average of shares outstanding remain the same as the first quarter, we are anticipating a range for earnings per share of 12 cents to 14 cents for the second quarter of 2002.

Mark, back to you.

Thank you, Jim.

As the numbers that Jim has provided you show our accustom efforts have continued, but they have not continued to the detriment of our investment in the future. Although, our -- our cost have been reduced, our investment in engineering and our investments in the future have been maintained at approximately the exact same levels as they were in the end of last year.

Our gross profits percentage, however, has continued to improve and that has been the result of some of the investments that we have been making elsewhere in the company.

Our new product generations continue to be introduced by engineering and as they are these provide us both a competitive advantage in relationship to the market, but it also provides us with a lower cost model to be able to increase the overall gross profit position of the company.

As Jim pointed out, over the last year we have improved that from 43 to 45 and now 47. As we work our way back up to the returns in the 50 to 55 percent range, that we have seen in the past, and still consider to be normal for the -- this company in normal periods of time.

Although we cannot predict, obviously, the exact timing of a recovery in the IT spending environment we certainly stand ready to take full advantage of it's inevitable return and to be -- find ourselves in an excellent competitive position as that IT spending returns and gets back to -- to normal in this .

At this point in time, , I think it would be appropriate for us to swap over to the question and answer period and be more than happy, any one of the three of us, to take whatever questions you may have for us at this time.

At this time I would like to remind everyone in order to ask a question, please press star, then the number one, your telephone keypad. If you are using a speakerphone please pick up your handset before asking your question.

Please hold for your first question.

Your first question comes from the line of with .

Thank you very much.

I'd just like to clarify a couple of balance sheet items. The company continued to have over a hundred million on it's balance sheet in long term investments and know it's got about a 50 million dollar revenue bond on which it pays interest. What constitutes the -- the balance of that -- that 100 million

Jim, I think that's an appropriate question for you.

Sure. On the -- on the balance sheet in long term investments you have -- we show about 173 ...

Seventy-three, yes.

... million dollars.

Yes.

Within that number is about 50 million dollars of collateral balance requirement for the Alabama state industrial development bond. The remaining of that comprises a combination of fixed income securities and equity securities. Fixed income securities total roughly about 80 percent and the equity securities total roughly 20 percent, the remaining balance.

The -- the fixed income securities are double A rated or -- or over, typically overall, and have average maturity of about three-and-a-half years, which maturity as well. The equity investments comprise investment grade equities traded on either NASDAQ or NYSE.

So they're all publicly traded securities?

That is correct. We do have a very small balance, about $3 million that is with privately held companies.

, could indicate whether or not there were any material net investment, real -- realized investment gains in the quarter that would've been included in that other income category?

There were -- there were no net realized investment gains for the quarter.

OK, thank you.

Your next question is from of .

Hi, one little housekeeping thing. What was the enterprise versus carrier sales split in the fourth quarter? Do you happen to have that in front of you?

Yes, Q4 was 60 percent carrier and 40 percent ...

A little bit different than that, wasn't, Jim? Was it -- the numbers that you -- you gave in your ...

Fourth quarter?

Oh.

Yes, I think asked for fourth quarter.

Excuse me, excuse me. OK.

Right, ?

Yes, fourth quarter. Yes, there was a blank spot in my spreadsheet.

Right. Sixty and 40.

Excuse me.

OK, and then I wonder if you could talk -- you guys could talk about just sort of, you know, the tone of the enterprise market. We've heard all kinds of stuff lately about, you know, how bad it is and, you know, how -- how -- you know, all this doom and gloom stuff and -- and maybe you could talk about, you know, what you saw in the quarter and sort of what you're seeing now and what you expect later on in the year.

I'll take that, . Yes, this is Mark.

I think that January and February was sort of as -- as you said. It was 100 percent doom and gloom. It -- the first quarter of the year for us is -- is always the weakest quarter of the year and that's just the seasonality nature of the -- of the thing.

This first quarter, both January and February were extremely poor, as it just appeared that everybody had gone on vacation and just simply wasn't doing anything. We did see, however, as we got into March a considerable improvement in the tone and just in the nature of the -- of the business environment. I would caution to say, however, that a month, or at this point in time, six weeks is just simply not long enough to -- to be truly meaningful, but thank heavens that it was in the right direction coming off of that first two months of the quarter.

OK, and then to extend that question, what about pricing in the enterprise market? We've heard some stuff about how pricing is going to be declining 25 percent a year.

, that we haven't seen and we haven't seen that in either enterprise or the -- the carrier markets that we happen to be in. Now, I happen to think that a lot of that is our competitive position that we find ourselves in, both the -- those general markets with our products.

But, in general, we have -- have seen -- not seen a significant price decline in either of our two general market places.

And then one more and I'll let other people get in. And that is, did -- did you have any activity among the carriers on digital loop carrier in the first quarter or any other new products that -- or market share gains, that could be specified and noted?

At this point in time we have none that we can really specify and note. The one thing -- Howard, would you like to discuss the -- the -- the win in South America?

Well, that was a -- a notable achievement for the quarter actually. We have the business with both of the major telephone companies in and in fact initiated shipments in the -- in one case. So we're looking at that as being a -- a significant development for our international business and hopefully we'll have some more of this kind of a thing to talk about in the future.

OK, thanks.

Your next question is from of .

Yes, Mark and Howard, can you hear me?

Yes.

Yes.

Yes, I have a question on the transition to G.S and HDSL in particular in the international markets. Could you give us status update on how the progression is going from proprietary HDSL and SDSL's to G.S and -- and particular in the international markets, but also if there has been any movement at all or if there's any movement in the horizon for the standards base -- based in transition in the US as well?

Howard, I think that's ...

Well, I'll take the international part and -- , we did lighten the quarter after a long period of testing. Everything began shipment of FHDSL into the Asia Pacific region. We did have some earlier shipments late last year, as you may recall, and the technology we're finding at this point is quite robust and our customers appear to like it.

It's -- it's got, for them, major advantages over what they've got now with E1 HDSL, and the interesting thing is, it's -- in virtually every case that's pulling through our systems level business with the 3000 and most of the deployments so far of FHDSL is in TDM mode as opposed to something else and generally being used to carry business data and information primarily for frame relay customers and to increase path IP over frame. And thus far, it's -- we're very optimistic as we look to the future and most of those customers have -- appear to be quite satisfied with the technology and what it affords them going forward.

The second part of your question was -- I didn't quite understand. Was ...

I think -- I think it was domestic, Howard.

Domestic, yes.

If there's any -- any hope on the horizon that we will see the transition G.S in the US market as well.

In the domestic market we just don't see any movement. It's a much slower market to change.

So it's -- it basically -- at least for the rest of this year, really no standards base to be counted on, but -- but, I mean, do you think there will be a at some point or is it just ...

It would surprise -- it would surprise me within the encumbrance that -- that the shift would never occur.

Wow. All right, well, thanks a lot.

OK.

Your next question comes from the line of with Deutsche Bank Alex Brown.

Hi, guys. Thank you very much.

I wanted to ask about the digital business transport area. It looked like it was down quite a bit on a sequential basis. Maybe you can give us a sense for what's driving that. Is it just sort of the same trans in terms of ISDN and DDS kinds of services, and then maybe you can give us a sense for the outlook there, thanks.

OK. ISDN, of course, is in the downward trend and I think that the acceleration of that, that we saw in that area, in the first quarter, is primarily due to the demise of a couple of CLECs that primarily were using ISDN technology, that they were buying -- or, leasing, excuse me, the circuits from the where we were supplied, of course, the ISDN transport technology to the incumbent carriers. And so as they fell on hard times, and really a couple of them went out of business, then their -- of course their leasing of ISDN technology from the ILECs was stopped.

In the DDS area, that is normally, at this point in time, used for the accessing of frame relay network and it is strictly dependent on the -- the IT spending area and the -- the need for additional frame relay circuits. That business we see as a -- was a little bit more -- more stable than the ISDN business, in fact, and as we look forward to IT spending coming back, why, we see that being a much more stable business than -- than the circuits that were really dependent in the ISN area on the CLECs community.

Got it. Do you have any sense on how this category is broken down between I -- ISDN type of equipment versus DDS? Just trying to understand maybe what the outlook might then mean going forward.

Off the top of my head, no, I don't. I -- both of them are significant, but I -- I think that DDS is a larger component of ...

Got it. Thanks.

Your next question comes from the line of with .

Yes, good morning, gentlemen. Mark, could you -- could you talk about -- you know, you're -- you're providing guidance for a upturn in sales. Is most of this coming from just a -- you know, a resizing of inventories at the carriers or are you actually seeing increased demand for T1 services at the -- the end point, at the -- at the users? Or, is it just coming from new opportunities you're seeing, like your -- your wins in -- in and new shipments to Asia that you're talking about?

The major thing is seasonality in that the first quarter in -- in -- is -- the first quarter problems are due to weather, due to a whole bunch of different things. Except that over the years we -- we have seen the first quarter is a seasonally weak period of time that tends to come back significantly after that first quarter in the second and third. And so the -- the major -- the major thing we're seeing, those other characteristics that you talked about are important, yes, but the big -- the big thing is seasonality.

Would you -- would you expect this trend to continue into the -- into the second half of the year or are you unwilling to provide that guidance at this point?

I'm unwilling to attempt to project the changes that we're going to see in the -- in the overall economy or in the IT -- IT spending area in the second half. It has been a situation that as far as I'm concerned is just impossible for anyone to realistically try to predict.

OK, great. And -- and can you talk a little bit about the and sort of what level of sales that's at and, you know, how the progress in penetrating accounts with that product is coming along?

I'd love to talk about the . Let's get off the -- the economy and get on to -- to things like fantastic new products.

Right.

The is being accepted with open arms at two of the at this point in time. We are still waiting on . That should be through in six to eight weeks. At that point in time we hope to be in a totally approved position where we will be able to ship without having to have the one time approval that we are currently obtaining for the different applications for the .

By the way, the is a OC3 multiplexor that is our first introduction into the -- the standalone silent . We have great expectations for its revenue producing capability. However, we all have to remember that we are -- we're dealing with ILECs, which is the -- of course, the best percentage of the market. It is an enormous market.

However, it is one that does not take to new products in a very short period of time. It is a slow process. We've been going through the process for -- for the new product now for about six months, six to eight months. The paperwork and the rest of the things that are required to introduce, to get into full volume production, with the is not an instantaneous process, if we realistically look at it.

On the other hand we know the market is there. We know the opinion of our customers of our -- our new product and we look at a very, very significant ramp in revenue for it over the future, but not in a weekly or monthly basis. It's going to take a full year from its introduction at least to bring it up to full volume.

Great. And -- and -- and -- as it does ramp up into full volume, the margins, are they going to be -- are they going to drag on corporate average or would I expect them to -- to come up to speed fairly quickly?

We've been expected the very first day that they would greatly enhance the corporate average. This particular market is populated by products that many of them are very, very long in the tooth having been on the market, some of them, for five, seven years, by bringing in to -- to that market new products with new technology. It's enabled us to provide a very, very competitive product while at the same time greatly enhancing our gross profit potential, even starting day one.

Great. very much.

Your next question comes from the line of with Morgan Stanley.

Thank you. Could you talk a little more about pricing trends, Mark. Perhaps, you know, what -- what kind of declines you see for a specific unit year of year. You know, like any -- in general, like, do you plan on a 10 percent, 20 percent? I mean, I think prices do go down, so I'm just wondering what you're generally thinking.

OK. No question about the fact that prices obviously go down, except that when you start talking about percentage decline so you have to look at the -- each individual product because it's so terribly significantly different.

There was a question here earlier about ISDN and DSS and -- and the older technology. These products in fact are hardly declined at all at this point in time. They're pretty -- pretty well stable. We have an enormous market share.

On the carrier side for both of those technologies we have transferred most of the business over to our proprietary technology and -- and in that area we find prices to be stable. We never see them going up, but if I had to give you a percentage I would say five or less percent decline.

Above that, in the HDSL area, we've seen exceptionally stable prices. We had a very, very significant pricing situation about a year ago. What is happening to us and one of the -- one of the reasons that we're able to improve our gross margins is that since that point in time we have been bringing in cost savings into that product area, bringing the gross margin that was not satisfactory a year ago closer to satisfactory levels. We anticipate some new technology coming on at the very end of the second quarter that would greatly enhance the gross margins in that area.

Those prices have also been reasonably stable. However, there's probably going to be over the next year another round of RFQ's. It should drop those by -- by some percentage and if I had to guess I'd say 10, but I really don't, of course, really know. But there will be some decline there. In the systems area, I would say there that we're probably seeing between 10 and 15 percent or so.

And so really when you look at the overall pricing that have gone through the different major areas, from a historical basis, the pricing pressure of the products that we have are not that severe and they're in a range that historically and currently we should be in an excellent position with our re-engineering and cost savings in those different product generations to be able to out do the decline with our new declining cost. So that side of the equation, the gross margin, that side of our business, we look at very favorably.

OK. Could you talk about your operating cost levels? Are these sustainable? You had a big price -- I think you had some sort of a salary cut in October time frame. Is that something you -- that ? Do you expect to, you know, resume the original salaries as the economy picks up or how -- how's that going to play out?

Yes, we did. We had a reduction, salary reduction, across the operations operating expense area. That is still enforce. We do not anticipate that it's going to obviously stay enforce forever. It was significant, but it was -- I'm -- I'm trying to figure out exactly how to give you a -- a good and honest handle on the nature and the significance of it.

Let's say it's -- it was five percent range of our total operating expense. I would certainly anticipate that we will reverse that and go back to the original level sometime between now and the end of this year. And we look -- all of us, very, very carefully at the -- the business and we will make that change back to the original area absolutely at the first earliest point that we feel safe to be able to do so. But it is not an enormous change, as said. I think the proper way to look at it is about a five-percent change in the operating expense line itself.

OK. One last question here. On international sales, what do you think that it could be as percent to the end of this year and then to the end of next year? You know, I'm trying to get a sense of how ...

Let's see if we get Howard to commit to that.

Yes.

Well, I think, Mike, we're too early in the -- in the process to really have a good grip on that, that you're well aware. International sales is only five, five-and-a-half percent of our total. I believe, however, that the percentage will go up.

The sales team that's this program are -- has some very ambitious goals. But, there are a lot of uncertainties in all that and like the in this country, international carriers have similar long approval and test cycles that we're very accustomed to and never can quite predict when that's going to run its course. But overall we remain very optimistic about the international content, but I really wouldn't want to go further than saying that I expect them to be up at the end of this year, the percentage to be up at the end of this year, and up again at the end of next year.

OK. Hey, I'm sorry, I have one more. The digital carrier product, how's that traction You had talked about looking at this thing seriously. Are they buying it yet or just about to or where are we with that?

They're buying it, but we're in the very early stages of the -- of the cycle.

So do you expect some -- some -- you know, an significant in the near term or ...

Once again, with the -- with -- in the environment it is a long period ramp, not a set function, but we -- we look at that to be more and more a significant part of our revenue going forward.

Thank you.

Your next question comes from the line of with US Bancorp Piper Jaffray.

Yes, it's . Good morning.

Good morning.

just want follow up on that question regarding the DLC and also the . If you could give a sense of what the contribution was for most of your products in the first quarter and what they might be by the year end. I understand it's a long cycle in terms of, you know, from an standpoint. But, then also who -- who's the main competition on the DLC product, Mark?

OK, as far as the -- the breakout of those numbers, that's something that at this point in time I just do not have. We have -- we -- we basically break them out as we report it, but as a breakout of those two individual items I just don't have them in front of me as far as the current and therefore would not be in a position to try to estimate for you and try to give you any kind of a good honest numbers, what that's going to grow to as we get on through the year.

I think that you ought to be able to talk to us over the year as we get further into that and -- and we'll be -- we're happy to keep you up to date on it, but right now I just don't have those numbers.

competing mostly with the very small line size DLC's or ...

Well, it is a small line size -- yes, and not -- not the real -- not the DSC type of product, no.

You had strengthened systems and -- and I noticed, you know, some of your peers in the IAD space have pre-announced Q1 results. Do you have a -- was it IAD business strong as well or was some of the strength in systems in other -- other product areas?

I think that the two things in the IAD space, some selected -- CLECs, as you well now, got into severe financial trouble here recently and probably some of the other biggest reason would -- would be our picking up market share.

We've done very, very well in the IAD space and to do that unfortunately right now the only way you can is picking up market share, which we have been very, very successful over the past six months especially in doing just that and look forward to -- as we go further through this year to continue to -- to keep picking up market share.

And then just a final, and -- and where were the CLECs as a percent of sales? Were there any changes in order pattern to some of the key CLECs customers like and AT&T Local Services?

Oh, at this point in time we have to give you our point of sale numbers from our distributors, which always runs about 30 -- or, about 45 days behind the times and it's sort of a mixed bag as far as the different individual CLECs.

As we said, some of them -- or a couple of them -- got into financial trouble, obviously, in the last three or four months. You mentioned AT&T, of course, that's not that case. In there, of course, things are very, very strong. So it's a -- it really very depending on which particular accounts you are discussing.

As far as the overall percentage, I don't have it. Jim, do you?

Yes. The overall percentage of -- of CLECs specifically is 12 percent.

OK, thank you.

Very good, thank you.

Your next question comes from the line of with .

Yes. Good morning, gentlemen. Could you -- just kind of housekeeping question.

On the stockholder's equity between fourth quarter and first quarter it didn't really change significantly despite the earnings. Is there something going on with unrealized gains and securities or something, that ...

Yes, that's what it is. It's unrealized gains in dialogue semi-conductor, which is a security that we hold.

I guess it would be unrealized losses ...

Sorry, unrealized losses, yes. Unrealized losses.

In dialogue. OK.

And then can you give us some indication of the -- I think you mentioned that G.S HDSL had -- had some penetration into Asia. Have you -- have you been at all successful in -- in Europe, and -- and could you just give us a little more color on that progress in both those markets?

Howard.

We have been focused primarily in the Asia Pacific region. Primarily because they don't have an incumbent -- they don't have incumbent suppliers that have such strong government support. So it's an easier market to penetrate.

We are active in Europe but at a much lower level than in Asia Pacific and in South America and Canada. Or, excuse me, in South America. So, right now we have very modest expectations out of Europe and most of it's in the Asia Pacific region.

Very good, thank you.

Your next question comes from the line of with .

Good morning. I just had a quick question. I miss the -- the cash flow from operations and then as a -- as a more in depth question, I was wondering whether or not you all could elaborate much in terms of the competitive picture for some of the enterprise -- enterprise products and whether or not you're seeing much competition in areas such as VPN Routers from lower end vendors.

OK. Jim, you want to take the first part of that?

Sure. I mentioned before that cash flow from operations was 29 million dollars for the first quarter, and that -- that comprises primarily reductions in inventory balances and receivable's.

OK, great. Thank you.

Those were the primary drivers.

Thanks, Jim. And I guess ...

... the other question was really in terms of the, you know, competition and competitive landscape with respect to some of the enterprise products.

In the enterprise area the -- the competition is a barbell and so what you have then is a number of smaller companies that quite frankly over the last six months they have been plagued with the -- the competitors, with financial problems to the extent that it -- the competition with your smaller concerns has -- has really not been that significant and has really and truly decreased notably in it's importance over the last six months.

The other end of the barbell, of course, is Cisco and so you -- you mentioned small companies that were in the router business. Well, we -- we don't feel the effect there at all, but of course everybody feels an effect with Cisco. So it's a -- sort of a barbell type of competitive landscape, you know, in that enterprise area.

OK, and -- and nothing really in terms of -- of , any of , any of those -- the newer manufacturers at this point?

No, very -- very, very little.

OK. Great, thank you.

All right.

Your next question comes from the line of with .

Hi. Something I noticed here when I was looking through some numbers. Your sales were flat on a -- on a sequential basis, which is really kind of extraordinary when you hear all of the other -- what all of the other equipment companies are coming out and saying.

Can you explain that? I mean, is that just a fluke or is -- was something going on

No, it wasn't a fluke, and I think that -- that who's the General Manager of our division would thank you very much for not only that question but your comments because there's a tremendous amount of effort that has gone into making the -- the numbers in that environment that we all know is extremely difficult right now, be as strong as they are.

And it is a combination of -- of market share. The new products that we talked about, it is not any one significant single thing, but a heck of a lot of work that is done all the way across the board.

And one thing also to remember, that the numbers that a lot of the concerns are putting out, which we believe to be accurate, that the cap ex spending for this year, that everybody is estimating that it's going to be down by 20 to 25 percent, and we find no fault with that except that our business is more in the operating side of it rather than the cap ex.

We're not into the long haul. We're not into that big infrastructure or big iron. We're in the access business and so we keep talking here about the pick up in IT spending because that is the thing that drives us and as that comes back whenever someone places an order for a T1 service or for an additional frame relay drop then the odds are very, very good that we just got ourselves an order from an incumbent telephone company.

So, no, we don't think that was a fluke at all. We think that -- that a lot of work went into having those -- that revenue flat and we -- we think that that will be also a -- a help as we forecast a slow improvement in -- in revenue going forward through the year.

Well, one thing that has -- you know, comes to mind on this is that, you know, the -- the winter wasn't very severe and, you know, one of the explanations we always have for the seasonality in -- in that line is that, you know, it snows in the northern part of the country and they -- you know, they just don't install as much. And I wonder if maybe installations of -- you know, of new lines were -- was higher just for that factor and then a related question would be, what about T1 growth? Do you guys have any sort of in sight into what the T1 deployment and demand situation is these days?

OK, the -- the -- the significance of the warmer winter, I wish I knew but I -- I really don't -- I don't think that we can cut the -- cut the pie that thin to be able to truly tell what impact a warmer winter would have.

The big thing there is that people tend to finish and schedule production -- I mean, construction jobs to be through in the fall and you don't really have too many construction completed in the winter months. And a lot of that is simply due that you -- to the fact that you don't schedule those completion's during that time frame because you anticipate the colder weather.

So I -- as far as what the difference would be because of the warmer winter, , I just don't know. I don't have a feel for it, and now I have forgot the other half of your question. What was it, ?

And that -- that's a fair answer, by the way. In -- in the T1 -- T1 line growth, do you got any sort of in sight into what -- what's going on out there in the market?

With the current environment I think it's flat to up 10 percent.

OK. And then I've got two other questions. One, is you mentioned Cisco as a competitor. Are they -- you know, have they been driving price down? What -- you know, how -- how have they been as a competitor just lately and, you know, what about Adtran versus Cisco in the IAD market? What -- what could you say about that?

You really need to talk to to -- to get into that kind of detail because off the top of my head I'm not sure of what IAD products that Cisco has to start with.

I think that when you talk about competitive nature, that everybody experiences and sees in the enterprise market, that you are not fully addressing this subject unless you also talk about Cisco due to their enormous size in breadth of their market.

But, quite frankly, on a day to day basis, we don't have that enormous a product overlap, but you -- you really can't talk about prices in an enterprise market without -- you know, without Cisco obviously being a part of it. And we don't really see them being that aggressive, quite frankly, in price, at least to the best of my knowledge. But is the man to give you the kind of detail you're asking, I guess, .

OK, and the last question for you, Mark, and this is more of a blue-sky question. I mean, what -- in the next couple of years or so -- you know, it's obvious that Adtran has -- has made this transition from sort of a -- you know, selling lots of plugs and, you know, sort of legacy sort of, you know, slower speed stuff to systems.

You know, a couple of years from now, you know, what's Ad -- what's Adtran going to look like, do you think, and is there either any, you know, significant new trends coming along like, I don't know, EPN or -- or, you know, the extension of fiber further to the -- to the buildings or -- or anything else that are going to -- would be Adtran just proportionately ease of the other vendors?

Well, I think that Adtran, number one, is going to do well. A lot of that question, I think that we would -- we would have to go sit in a very cool quiet place if we're going to contemplate, you know, that type of -- of -- of thing in the future. That over the last year-and-a-half or so I think I -- as well as a whole bunch of people -- have figured out how little capability we all have in predicting the future.

The one thing I am sure of, as -- as you asked me, where I think Adtran's going to be two, three, four years down the road. I think we're going to be larger. I think we're going to be stronger, and I certainly think that the -- our profit and our competitive status will be right back where it was before the -- the current environment that we've seen in the -- in the market.

We get back to any kind of normality in that market and you're going to see the Adtran gross profit line back up to the 50, 55 percent range that -- where it ought to be and you're going to see our pretax profit move back up to those levels where it used to be and should be and will be, in my opinion, in the future. But only when we see the -- the overall IT marketplace get back to a more normal environment.

What it's going to look like in detail and when that's going to be, , I can't predict the future that well.

OK, thanks. You guys have been doing a heck of a job.

Thank you.

Your next question comes from the line of with Cobalt Capital.

Hi, guys. Just -- I guess it's more trying to predict the future, but clearly your business has held up a lot better than people would've thought, your competitors in the downturn. What happens if -- when the carrier cap ex starts going up? Do you guys see a benefit in your business or -- or it's kind of like you won't see nearly as much of a pick up as some of the other guys?

The only thing say at least as much or more because what it amounts to is that with our type of value oriented company and value oriented product line than it is very difficult for you to pick up market share when you're in a bubble or a boom environment.

When you get into the kind of market that we have seen in the last year, that is the kind of market that historically we've been able to pick up market share and -- and once we get a market share -- if you look at our history -- we don't tend to lose it. And so therefore, in my opinion, that we're -- we're continually getting ourselves in a position to be much, much stronger out of the box and out of the gate as we see the overall IT spending situation recover.

At this point, , we are getting pretty close to the end of our hour. What I'd like to do at this point is maybe take one more question, if we could?

OK. Your final question comes from the line of with Legg Mason.

Mark. Hey, Jim, great job this quarter given the margin environment. I just wanted to follow up quickly to question concerning operating expenses. Could you talk a little bit more about how you achieved the reductions in the SG&A line from fourth quarter to first quarter and maybe if you provide the employee count at the end of this quarter? Thank you.

OK. I think the employee count's about flat, isn't it, Jim?

Yes, it is. It's like 1,647 or something very close to that.

Yes, and the way we did it is through the cooperation of all of that 1,640 employees, in that it is very obvious to everyone here, any employee all they have to do is just go home and turn on the television and they'll find out really quick the shape of the all overall communications business.

If they look at the competitors and see the kind of financial shape their in and what they're doing with their employee base then they -- they look inward into this company and they said aren't we very, very lucky to be here and for us to be able to keep the environment that we have and keep the culture that we have, that what we have to do right now is to save money.

And so rather than a half a dozen of us running around trying to figure out how we can save a lot of money in any one thing we might do, what we've got is about 1,600 people running around trying to figure out how they can each save a nickel or a dollar and that adds up to many times more than what Jim and I could possibly ever do.

And -- and so at this point in time I can't even point to a single thing that we have done from the fourth quarter to the first quarter. Maybe Jim can ...

Well, remember in the fourth quarter we did increase our allowance for bad debt for the distributor that we talked about on the fourth quarter conference call.

Right, but as -- as far as the normal operating expense levels, other than that bad debt expense, we did not initiate any activity of -- of major significance because savings came simply from the efforts of the -- of all of the employees.

That is correct, yes.

All right, gentlemen, thank you.

Thank you. OK, , at this point in time I think we have -- we've been on our call here for about an hour. We appreciate everybody that took the time to call in to talk to us and to ask questions. We appreciate your interest in our company and we resolve and promise to you that we will do everything we can to enhance Adtran both for the employees, our customers, and our stockholders. So thank you very much for being on our call today.

Thank you for participating in today's conference. You may now disconnect.