ADTRAN Holdings Inc (ADTN) 2002 Q4 法說會逐字稿

Good morning, my name is Stephanie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Adtran fourth quarter release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, press star 1 on your telephone keypad. Questions will be taken in the order they're 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 uncertainties includes the successful development and market acceptance of new products, the degree of competition in the market for such products, the products and channel mix, component cost, manufacturing efficiencies and other risks detailed in our annual report on form 10-K for the year ending 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. Allow, President and Chief Operating Officer, Mr. Howard Sutter, and Mr. Howard THRAIKILL. Mr. Smith, you may begin your conference.

Thank you, Stephanie. Good morning and welcome to Adtran's year end conference call. This past year, especially the fourth quarter, has been a period of significant achievements for Adtran in a very unusually weak environment. It's there for our pleasure at this point to ask Jim Matthews, our CFO to provide you with those operating results for the fourth quarter in this past year. Jim.

Thank you, Mark. Good morning, everyone. Um, as disclosed in the press release, revenue for the fourth quarter was $88.4 million. This was our third sequential quarterly increase in revenue. Revenue for the fourth quarter compromised the following. HDSL T-1 was 43 million, down from 46.5 million in Q4 of '01, and down from 44.4 million in Q3 of '02. However, systems were 34.2 million in Q4, up from 25.4 million in Q4 of '01 and up from 32.7 million in Q3 of '02, and verbal business international airport total reach was 11.2 million in Q4, down from 17.3 million in Q4 of '01, and slightly up from 11 million in Q3 of '02. By market, the revenue breakdown for the quarter was 64.7% per carrier, and 35.3% per enterprise. The carrier and enterprise percentages include the perspective share of revenue from the international sector, which approximated 7.5% of the total. Total international revenues were 20.3 million dollars for the year 2002, a 15% increase over the prior year. Gross margin was 54.8% of revenues during the fourth quarter of 2002, compared to 51.6% for Q3 of '02, and 44.8% for Q4 of '01. The increase in gross margin is primarily due to continued improvements in manufacturing efficiencies and the impact of ACSLT 2 cost reductions. 13.8 million reductions in compared to 14.3 million in Q3 of '02. Selling expenses were 20.5 million for Q4 of '02, compared to no one.6 million for Q3 of '02. Total operating expenses were up 700,000 from Q3 of '02, primarily due to the full impact of salaries reinstated last September, partially offset by a decrease in the quarter and nonpayroll-related discretionary expenses. The salary reinstatement stems from salary reductions that were imposed in October of 2001 as part of a cost reduction program. Earnings per share assuming dilution for Q4 '02 were 32 cents compared to 10 cents for the same period last year.

From a balance sheet perspective, we continue to generate significant amounts of cash and improve our working capital position. Inventories were down 1.5 million from the prior quarter to 39.9 million on increased revenue. Trade accounts receivable decreased at 38.9 million dollars on increased revenue. DSO's came in at 42 days, down from 47 days, September 30, '02, and down from 52 days of June 30 of '02. Net cash provided by operating activities was approximately $19 million for the three months into December 31 of '02. Cash and marketable securities net of debt totaled $270 million at year end.

Now, I would like to discuss guidance for the first quarter of '03 and for the year. Adtran does, as each knows, not carry significant amounts of backlog from quarter to quarter and from year to year. As we remain in business. Historically, due to seasonality, regardless of overall market conditions, the first quarter is typically down in revenue. Considering these factors, we're estimating revenue in a range between $84 million and $87 million for Q1 of '03. Given the nature of our business, it's very difficult to predict the outcome of our product mix early in the quarter. We're guiding gross margins for the first quarter in the range of 52.5%, and operating expenses should be in the range of $35.2 million in Q1. Also, we're guiding interest income, net of entry expense to be in the range of 1.9 million consistent with the last quarter. Taking these factors into consideration, and assuming weighed shares outstanding remain the same as the fourth quarter, we're anticipating a range for earnings per share of 20 cents to 24 cents for the first quarter of '03.

Currently, we do not yet see any indication that overall IT spending is increasing, therefore, we are forecasting flat market conditions; however, we do believe that in this environment we will continue to gain market share in addition to seeing more significant volumes materialize from new products we have introduced in recent quarters. The more significant new products were comprised axes routers, D-slams, and other products. Therefore, we're guiding revenue for the year to be between $360 million and $380 million. Historically, normal gross margins have been in the area of 55%. Being a book and ship business is difficult to predict product mix, which could cause margin fluctuations quarter to quarter. For 2003, where thus guiding gross margins at 52.5%, operating expenses of about 35 1/2 million dollars per quarter, and interest income, net of interest expense of $1.9 million per quarter. We're also assuming a tax provision rate of 29% for 2003 this. Results in earnings per share of $1 to $1.20 for the year. 2003.

Mark, back to you, sir.

Thank you. Before we start the question-and-answer session, I would like to take a few minutes and go into some more detail behind Adtran's achievements in 2002. And a few thoughts, um, early thoughts about 2003. As you have seen, we have consistently raised our gross margins from the low 40% range of two years ago to the current quarters, 54.8. We stated that many times over the years that our long-term goal for gross profit is to hold that in the 50 to 55% rate. When we hit the significant and unanticipated decline in market conditions two years ago, then that dropped rapidly into the low 40% range, but it, during the last two years, we have brought it back and, in fact, at this point in time in the last quarter, we're at the high-end of the range. So gross margins we brought back to normal, normal range. And we have done this without any one-time charges. We did it by first consuming the excess material inventory levels that we had earlier purchased at much higher prices and then as we consumed the material as you have noticed, we have brought down that inventory to about 50% level from what it was two years ago, and as we consumed the excess material, we were then able to negotiate lower prices resulting in lower cost of sales and higher gross margins. All, our cost reduction program continued unabated during this time frame, which resulted in new generations of lower cost of products. During the last two years, we have not reduced our engineering effort, but have kept it at full steam both in the reduction program of ongoing costs as well as bringing new and exciting products to market. Further in, manufacturing our subcontracting was rationalized to include two subcontractors with one in Mexico and one in China. Previously, we had used for many years midsized subcontractors to do all of our, um, assembly processes.

In the late '90s, it turned out that every one of the midsize subcontractors we had got consolidated into the large, um, subcontractors dominated the scene since then. During the last two years, um, we have been moved to a single subcontractor that we're using in Mexico as well as the single subcontractor that we're using in China. This was based on our choice rather than as a subcontractors that we had chosen got brought up by others to then move into their, um, subcontracting area. The third thing that we did is to do approximately, um, a third of the units manufactured actually in Huntsville and our own shops. This allowed us to -- while we were reducing our overall in venture, to significantly reduce the cycle time that we were able to offer, um, to our customers for new products, um, and for the smaller run products that we used to have manufactured at the subcontractor level. So, while we have done this, it has reduced the cycle times, which has allowed us to reduce our inventories by over 50%, while at the same time be able to increase our own on time deliveries.

On the operating expense side over the last year, a strong financial position allowed us to take a more long-term approach and, therefore, we did not devastate our engineering area or our field support area that many of our competitors were forced for financial reasons to have to undertake. While our gross margins were below power, however, we snouted a graddiated salary reduction for -- graduated salary reduction for employees, about $25,000 a year, and we eliminated salary-performance reviews. As our gross margins returned to normal, we reinstated all of the salaries as of September 1 as Jim has mentioned, of September 1, 2002, and we instituted the performance-salary performance reviews, which will become effect on January 6.

While operating expenses during this time frame has fallen 16% in the fourth quarter from its high point in the first quarter of 2001, the current 38.8% of revenue, we're still 8 to 10% above our long-term goal of 30%. Again, due to our financial strength and our current competitive advantage, we plan to hold this operating expense relatively flat. As the marketplace recovers, the percentage of operating expense will be reduced. In return, our net profit margins to our historical rate of between 24 and 25%, which is our long-term corporate goal. But not our corporate goal at this point in time, with the, um, reduced, um, marketplace activities. We will return to that as IT spending and the marketplace returns to more normal levels.

As we proceed in 2003, we, therefore, feel that we're very well positioned for a continuation of the flat market conditions at subpar levels that are current guidance for projects. Although we have no ability whatever to project the timing of a recovery, we are of -- we are absolutely convinced that a return to normal capital spending levels for IT and technology in general will definitely occur. Adtran at that time will be fully taking advantage of our market share position that we have gained and the available capacity that we currently have and have been able to generate during the last two years.

So, at this point then, I would like to have Stephanie turn the call over to the question-and-answer session and be happy to answer any questions that anyone might have and I'm able to answer. Stephanie.

At this time time, I would like to remind everyone in toward ask a question, please press star 1 on your telephone keypad. If you're using a speaker phone, please pick up the hand set before asking your question. Please hold for your first question. Your first question comes from Andy Shopig with Netmeg securities.

Good morning. A couple of questions first for you, Mark. I would like to ask you if you could comment on how you rate the factors that are affecting line growth right now. To what extent there has been fundamental changes, perhaps brought about by email increased uses versus the overall slowdown in Cap Ex spending. Do you have any insight into, you know, some of the factors or how certain factors are affecting the line growth.

Okay, Andy, um, to start with, let me completely restrict my remarks to the line growth from a, um, the business side. Primarily the business that we're in is providing a communications products, network products that are being used by the business user, not the home user. So first off, let's restrict to that. The thing that is driving line growth on the business side right now, Andy, is the lack, really, of any growth due to the current economic conditions and the lack of any additional capital spending what. We see is, um, especially in the, um, the suppose ranges that we're involved -- the speed ranges that we're involved in is pretty much a flat, um, line growth type of condition that we attribute to the lack of capital spending and the, um, the lack of capital spending, especially in the IT area, so as far as any drivers, um, that currently exist, we obviously don't have any -- any significant -- of any significance as we look to the future. I think that what we are seeing is a, um, a period of consolidation of the expenditures in the IT area that we have seen in the past, as well as the start of the built up or pent-up demand going forward. So, where we are now in the business environment is that there are not any significant new drivers, um, that are out there that we see, um, but there will be the, um, return to normalcy that we anticipate is going to happen, but we're just not in the position to try to estimate the timing.

No, I understand and thank you for that comment. Also, Jim for you, I don't know if you can give any color at this time, usually put the details in your 10-Q, 10-K with respect to the gross margins on the respective side of the business carrier networks related revenues, um to what extent, if any, did we see, um, a, um, improved margin more or less on the carrier or enterprise side on the quarter?

those margins for each respective verbal will be published in the 10-K, um, um, these -- the gross margin increases, um, um, were pretty much across the board. And major driver being the HDSL-2 impact that I said before. The specific details regarding the respective realities or gross margins will be in the 10-K.

Okay, thanks. I'll pass it on.

Your next question comes from Mark Seu of CE Unterberg, Towbin.

Thank you. It might be difficult to project, but can you give us your thoughts on what now products may contribute as a percentage of overall products by year end, maybe on the optical access, and also the low end routers and maybe if you can comment on the NED vent of router and your thoughts on the level share gain that you anticipate for the low end routers. Thank you.

Okay, um, I don't have the projections in front of me. That would be difficult, obviously to try to project, um, over the next year those three now products and how quickly they're going to take off. Um, I do feel very strongly that you have pretty well listed the three, um, product drivers that we -- that we have, um, going forward, namely the access router market, the optical, um, um, silent market, as well as the, um, the D-slam market all of which products has been introduced, products has currently generated in revenue, and that revenue is growing, um, since the three products involved are new to the marketplace, um, the significance, of course, is not very large at this point in time, and will be much more so at the end of the year, but it will be very difficult to try to, um, to estimate, um, we would certainly think that would be an -- a combination, the combination would be in excess of 10%, um, of the company's overall revenue, but would be able to give you a lot better information in that regard further or down in the year.

Okay. And may be if you could give us your thoughts on your market share of the low-end router market at the current stage.

At the current stage, it's diminimus. It's, um, very, very low. The low-end router market itself is so large, um, that our sales having only introduced products three months ago, of course, is still very small. But we look at that market at current pricing levels that are about a 1 1/2 to $2 billion market, so, um, we're not in the market share game yet, however, we summer plan to be there going forward in the future and the product that we have introduced, by the way, is to only the first in the series of products that we plan to introduce in the market.

Got it. Thank you and good luck.

Thank you.

Your next question comes from Alkesh Shah with Morgan Stanley Dean Witter.

Yes, thank you. Can you talk a little more about whether the deplanned -- is still focused and if you can give us color on traction, and secondly, a bookkeeping question, too, what was the head count at the end of the quarter?

Sure, as far as head count for the year end was 1,549.

Thanks.

Okay, um, as far as the D-slam, we are in, um, the first office application situation with a major, major [arbach]. We have a -- we had a lot -- a lot of customers now that are on line with our D-slam. The -- the testing process and the, um, trial -- are going well. We have no problems there. Um, it's a, um, obviously a rather long process to get into the production cycle, but we feel that we will be in that cycle by mid-year and feel very good about the Dslam of -- the situation at the -- at one major [RBOC], and two more RFQ-oriented activities that are perceived very well, so, um, we are looking, we feel very, very good in the Dslam area with the technology we have been able to bring to that market, and we think that the volume will definitely be significant for our company going forward, um, however in the carrier space to get through the approval cycle and to get into the high-volume production cycle takes longer than what we would like, but that is the process that we're familiar with and proceeding well on course with that product.

Thank you, Mark.

Your next question comes from George Notter of Deutsche Banc.

Hi, guys. Thank you very much. I wanted to ask you a question about gross margins looking into Q1, um, so with the step function down in margins that you're modeling, is that more about seasonal weakness in the top line? Is it about pricing reductions that you expect to roll back to customers, um, to start the new year, um, you can kind of give us the factors that it kind of motivate the downsequential guidance. Thanks.

George, I think it's more in regard to the unpredictability of mix going into the quarter and -- and we just want to -- we just want to be very, very careful when we give guidance in gross margins.

Got it. So is it fair to say that, um, you know, Mark, you have always said historically that is, you know, margins get to the high end of the 50 to 55% range, Adtran will be more inclined to consult a bit of pricing and give some of the value back to customers. Is that something you expect to do in Q1?

I think there will be some price reductions that will be built into Q1 the start of the year from a psychological basis is always one of the time frames that when you're negotiating with customers that, um, you will have price reductions kick in January 1, just one of those things that is normally happens. I think the biggest, um, differential that gave us the -- to the opinion that 52 1/2 was a sensible and reasonable number was just the overall reduction in volume that one anticipates always happens in that first quarter. So, I think it's yes, there is some pricing reduction in there, but it's more volume related.

Got it. And then, is there also any cost-reduction activities that is, um, you know, more prominent on the horizon here looking into Q1. Is it cost reduction activity, anything like that?

In fact, that is coming in during the Q1 time frame. Um, but the cost-reduction activities across the board, that will be, um, coming in throughout the entire year as it does here at Adtran every year. That is just simply an ongoing process, um, that every now and then we will hit a, um, a major step function with a significant product line like we did over the last year with HCSL 2, but, um, going forward, that is going to be just a continuing activity that goes on all the time.

Got it and in terms of product mix, um, Jim, you mentioned that product mix is a driver here on the gross margin side. What, um, what about product mixes is more interesting on the margin side. Should we be looking at, you know, digital business transport, kind of the highwayer-margin business and is that business kind of stabilizes or stays flat, is that what drives the product-mix benefit here or is there something else we should be looking at?

Well, I think you saw in the fourth quarter where -- where, um, um, systems revenue increased sequentially, okay, and that was -- that was partially a driver, um, um, on the increased margin side. Albeit the primary driver, again, was HCSL2 cost reduction, so I think that, um, um, well in reality, um, our systems usually have slightly higher gross margins than corporate average.

Got it. Hey, thanks very much.

Your next question comes from Antoine Wallman with Needham & Company.

You can hear me?

Yes.

A couple of questions, one on domestic international and that is uptick GDS internationally, in particular in Asian and Latin America. Secondly, do you see any interest and/or movement? The North American market or are they solely focused on HDSL2 and 4?

Howard why don't you take this.

Well, ANTOINE, probably knows we had our business pick up a bit in the fourth quarter in international, but we -- we're still seeing the, um, -- a trend internationally not unlike what we have in this country and that is demand just mushing along, but we are starting to see some of the impact of being leader in HCSL, somewhat batter -- better than in the past. Most of that has occurred in Asia, pacific region and to some extent, South America -- South America, but we don't see a, um, near-term substantial uptick in SHDSL, um, revenue in the domestically, although we have a lot of interest, believe it or not, which is a bit of a surprise for me.

So there is interest domestically, you're shipping some internationally.

Correct.

But not a lot on either front.

I think that is probably a fair summary.

Okay, thanks, Howard.

Your next question comes from Tim Bector with Legg Mason.

A really good quarter, Jim, I have a couple of housekeeping questions and a couple of others that require a longer answer. Can you tell us the percent am in the quarter and did you have stock buyback in the quarter?

The CLEC revenue percentage, Tim, was 16%, um, and we had no buyback in the fourth quarter.

All right, thank you. Um, here are my two questions. First of all, with respect to, um, reinstating pay, I know you have put back the salary, but to my knowledge, you have not reinstated bonuses for the sales people. I was wondering if you could talk about that, and secondly, if you could talk about how you look at R&D going forward. You have been keeping that number at 14 million, and I wonder if that ramps up if revenues ramp up.

Okay, Tim in, general, we don't have bonuses in the sales, um, area. We have commissions, of course, that we pay on salaries. And then we have commission schedules, um, that get triggered when quotas are met. But as far as a bonus program in general for the sales area, I would never have, really, never had that, um, the engineering, um, R&D expenses, once again, we plan to simply maintain them at the current level as we plan to maintain all of our expenses on the operating side, the current levels, um, going forward and, um, let the -- it increase in volume then reduce the operating expense as a percentage, but the absolute expense for itself would plan to hold steady.

All right, Mark. Thanks. Is that on the first part of the question there on the commissions as you call them, does that mean then as revenues get higher the commissions go up?

Always. Always. In fact, we would love to pay our sales people a lot more than we anticipate because that means our revenues would be a lot higher.

I would like to see that, too, Mark. Thank you.

Thank you.

Your next question comes from Michael Pairta of Kaufman Brothers.

Thank you, good morning, gentlemen. A couple of quick questions. First, Jim, is there any possibility for more working capital leverage. What I'm trying to work at is what level of cash flow from operations we can expect this year giving your guidance for EPS, and second question, um, for Mark on the net FANT -- net VANTA product series, the 2,0001, do you see that cannibalizing your tragically IAD product lines?

In regards to cash flow, we can address that by balance-sheet item. I think, um, accounts receivable DSO's would be sustainable going forward between 45 and 50 days. Um, I also think that inventory turns can be sustainable at four times per year. Going forward. Okay and -- , and um, you know the profit number by the guidance that we gave, so you should be able to blow those into your model.

Okay.

From your Cap Ex standpoint, I think, that um, we will be pretty much flat to '02. '02 we experience about 2, 2 1/2 million in Cap Ex and see no real need for an increase, um, in that in 03 at this point.

Right. How about on the payable side? I guess you experienced favorable cash flow impact given the transition to outflow manufacturing. Is there anymore leverage there or what do you see for this year?

I think we're about where we're going to be from an accounts payable balance, Michael, going forward. I don't think there is going to be any significant change there from a term standpoint or whatever. We may have some swings during the quarter, um, based on the timing of shipments from the contract manufacturers, um, and how that effects payableses, but I think overall, um, we're go about where we're going to be.

I see, thanks.

Okay, to get on to your other question. This is Mark. Um, no, the net van is not going to have that much of an impact on our IDs, because our IDs are primarily going into the independent and the SELEC environment. They're not going primarily into the RBOC community because of the architecture of the networks involved, um, and, yes, um, they all have built-in routers, but what these are -- what they're used for is to be able to combine the digital routing, um, and also pots and to then have a single product to be able to supply all of the needs for an end user, where the RBOC's are not really going in that direction, and so I think that what we are really looking at, um, is going to be two different architectures where these two products are going to be using, used in, and, um, I just don't see any relationship much; um, cannibalizing IUDs.

Excellent. Thank you.

Your next question comes from Todd Koffman with Raymond James & Associates Inc..

Thank you. Specific to the new access routers, are they now widely available throughout your distribution channel and, um, just related to that question, where are you characterizing those revenues in your three product segments?

Okay, um, todd, this is Mark. Yes, they're available, um, through our standard distribution channels and, in fact, the, um, most of our distributors should have the products in stock. Um, at this point, we are including that in what we call our systems sales, um, in the EN side of the business, the systems sales also includes any of the new product areas that we're just introducing and have not grown to the point that we feel that we can, um, reasonably break out the new product has separate line-item, and so in addition to being, um, the improved systems oriented area, it also picks up the new product to introductions.

Thank you.

Your next question comes from Nikos Castopalas with UBS Warburg.

Thanks. I had a couple of questions. Were there any 10% customers in this quarter and for the full year?

Yes, um, we have, um, three so-called 10% customers, SBC, Verizon and sprint and, um, the volumes relate to the order that I stated. And, um, we will be disclosing those percentages in the K, of course.

Okay, um, second question is on, um, operating expense guidance. I want to make sure I heard that right. Did you say 35.2 million for the first quarter and then kind of steady at that rate?

That's about right. Yes.

Okay, what -- why is -- why is the operating expense going up from the third and fourth quarter level, especially in the fourth quarter if you had some like year-end bonuses, et cetera.

We didn't have year-end bonuses in the fourth quarter. The fourth quarter did have the effect, um, of the reinstatement of salaries, the full effect of the reenstatement of salaries. We -- we are guiding roughly a 2.7% increase quarter over quarter in OPEX, a primary part of that is to re -- the reinstatement of merits. Okay.

Okay. All right.

That's a primary part of that.

Okay, and, um, my last question is, um, you talked about the component pricing, um, helping the gross margins as you, um, worked through your inventory and started buying newer components. What is your feel on how the pricing of components are -- are going to trend over the next quarter to, you see them being stable or do you see them continuing to decline? Do you have any perspective on that given it has such an impact on your gross margin?

Yes, Nico, this is Mark. I see them continuing to decline but not at the same rate we have seen here recently. With time and technology, the component pricings historically are in a slow, long-term decline. It was steep for us over the last couple years. The component prices were at pretty high levels back during the time of the bubble and that, of course, is when we naturally bought too many components. So we got rid of the older, more expensive, we had a significant decline. Going forward, it was continuing to decline, in my opinion, but not at that same rate.

Okay, thank you.

Your next question comes from Ted Jackson with UBS Piper Jaffray.

Thank you. A couple of questions. First of all on the HDSL front, I was curious if you could give us an outlook on what you expect out of that business for 2003, and also first, um, current quarter. And then secondly on the newer systems business, if you could take a couple of minutes, perhaps and highlight some of the newer products that you have coming out. I understand that you have more stuff on the optical front, um, also on some of the security products that are due to be refreshed and also on that front, curious if you're going to do I wantgraition with the security product line. Thanks.

Okay to start off, um, with -- we are projecting as we have said before, um, on an overall basis, HDSLs are going forward to go be flat. Um, once we see IT pick up, we think we will see a significant pickup in it 1 line of, um, T1 lines being used, have an effect on our HCSL business. In that area, we continue to pick up market shire and will do so every the next year; however, it's not going to be ultrasignificant do you to the, um, the place that we have ourselves into with the significant market share we already have. Um, in the other area, the three productings that we think will be the major contributors as we said, um, before will be the router, um, entrance, um, into the access router, the D-slam entrance into that business with new products, and, um, also into the silent OC3 and, um, area, you know, in all of those areas we will be introducing additional products during 2003. We have a, um, a new release of software that comes in the router area about every three months and we will be, um, introducing two to three additional routers during 2003 broadening the -- significantly broadening that line up in the, um, optical area. We will be bringing out during 2003 optical multiplexers to go along with the, um, optical terminal unit that the OC3 optical 3 that we currently have available. The same thing being true in the, um, D-slam area. Where we will will be bringing out new products there, expanding that line we have -- going to have a, um, a product that aims towards the 200 to 600 line size. We have brought out a multiplexer that is oriented, currently toward 24 line count. That will be, um, supplemental at a unit at 48 channel line count. So basically in all of those three areas that are new products for us, we will be significantly adding to each of those areas bringing them from a single product area into more of a product line that you need to have to be truly successful in each of those areas.

Thanks.

Your next question comes from Esther Choi with Wavemart.

Hi, my main question has been answered. I wanted to clarify. You expect the HDSL to cost reductions and the systems revenue to continue to be the drivers on your margin side?

Going forward, no. I think that going forward that the margins that we are at in HDSL and that we anticipate for the balance of the year will be at our normal levels. The drivers that we saw in that area was one over the past year was bringing HDSL town the range of our normal corporate margin levels. Once that is done and it's at the normal corporate levels, then, um, is that impact, I believe, is over.

All right, thanks.

Your next question comes from Tim Slevin with Parker Hunter.

Good morning, had a quick question relating to the D-slam market and the opportunities you see with the regional bells. Do you see the type of application niched to any significant extent toward, I should mention some of the new products coming out or, um, 200, 600 line count, and um, also, some of the smaller remote units. Are you looking at remote terminal applications as being a potential big driver or smaller COs, um, that's basically it.

That's exactly what we're looking at. When you look at what the RBOC's have done, the first installations were the obvious ones and the very large COs. Those are the, um, the first installing as that went in. They have a pretty well, um, hardware has gone, racks have gone into those large COs. Um, the, um, the thing now that needs to be done is to gain full coverage and to do that, hardware has to go into the mid- and small -- smaller COs, and it also has to be able to go into the remote terminals. The existing hardware in the past, the RBOCs have used, a fifth, it was simply too big and too expensive for the smaller COs and remote terminals and that's the main reason why the installations in those areas have been, um, reasonably poor and slow. That is why we designed the hardware we did aimed at those particular installations and that's where the interests, of course, is and in our opinion, the nice thing about it is that that's where the ongoing market first, um, the D-slams are, the greatest is in the mid- and small-size COs and in the remote terminals.

Thank you.

You have a follow-up question from George Notter with Deutsche Bank.

Thanks, guys, um, DSOes were down quite a bit sequentially was that more about linearity in the quarter or about improvement in the collects. Thanks.

Well, George, probably a little bit of both. The fourth quarter did have a, um, nuance in linearity from the standpoint of October being a higher volume so to speak than December. Okay, which does did happen the fourth quarter. That helps them bringing down DSLs.

Thanks.

Your next question comes from Andy Shopig with Netmeg Securities.

Jim just a clarification, please, on the other long-term investments of 176 million. How much of that is related to marketable equity securities and or private securities that are inclouded in that category.

Yes, all of that relates to $26 million in Markable equity securities. A small portion of that number, very small, say under a million-dollars relates to private equity.

Okay, so it's 26 million in total that's invested in other nonliquid, if you will, or cash-type securities.

I'm sorry, Andy, one more time?

It's 26 million in total of marketable or private securities.

Marketable equity securities, about 800,000 of that number is, um, private.

Okay. Thank you.

Yeah.

At this time time, there are no further questions. Do you have any closing remarks?

Thank you. What I would like to -- I would like to thank everybody for being on our conference called it. I appreciate your interest in, um, Adtran and look forward to talking with everyone in the first portion of April as we review our first quarter of 2003. So thank you all for being with us this morning. Good-bye.

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