ADTRAN Holdings Inc (ADTN) 2003 Q1 法說會逐字稿

Good morning. My name is la Tricia and I will be your conference facilitator today. At this time I would like to welcome everyone to the ADTRAN first-quarter release conference call. All lines have been placed on mute to prevent 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 simply press star 1 on your telephone keypad. 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 uncertainties 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 call, manufacturing efficiencies and other risks detailed in our annual report on Form 10-K for the year ended December 31st, 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 Matthew, Sr., Vice President and Chief Financial Officer. Mr. Smith, you may begin your conference.

Thank you. I would like to welcome everyone to our first quarter conference call. It's a pleasure to have the number that we have that's called in this morning. It's also a pleasure for me to be able to report to you on the continuing progress that we have made at ADTRAN during the first quarter of this year. To start that process, I would like to turn the call over to Jim Matthew, our Chief Financial Officer, and let him start by going over the financials for us. Jim.

Thank you, Mark. Good morning. As disclosed in the press release, revenue for the first quarter was $86.2 million and comprised the following. ADSL T1 was $37.7 million down from $45.1 million in Q1 of 2002. And down from $43 million in Q4 of 2002. The majority of this decline was in T1 DSU, CSU's sold by our enterprise division. Systems were $40.7 million in Q1 up from $26.6 million in Q1 of '02 and up from $34.2 million in Q4 of o '02. The increase in systems revenue is attributable to increasing sales of ADTRAN's total access 3,000 broadband platform and sales of new products comprising access routers, DSLAMs and optical access products.

Digital business transport total reach was $7.9 million in Q1 down from $11.6 million in Q1 of '02 and down from $11.2 million from Q4 of '02. By market, the revenue breakdown was 67 for carrier and 33% for enterprise. Revenue from the international sector approximated 3.8% of total revenue as international revenue streams continue to be lumpy. Gross margin was 54.6% of revenue during the first quarter of 2003 compared to 54.8% for Q4 of '02 and 47.2% for Q1 of '02.

The increase in gross margin Q1 of '02 is primarily due to continued improvements in manufacturing efficiencies and product cost reductions. Research & Development expenses were $14.3 million in Q1 of '03 compared to $13.8 million in Q4 of '02. Selling, general and administrative expenses were $20.2 million in Q1 of '03 compared to $20.5 million of Q4 of '02. Other income, net of interest expense was $2.2 million of Q1 of '03 compared to $1.9 million of Q4 of '02. This increase was primarily attributable to a foreign currency exchange transaction in the quarter.

Earnings-per-share are assuming dilution for Q1 of '03 were 27 cents compared to 11 cents for the same period last year. From a balance-sheet perspective, inventories were down $2.5 million from the prior quarter to $37.4 million. Trade accounts receivable increased to $49.2 million from December 31, '02. DSOs came in at 51 days up from 42 days at December 30 of '02 but down from 60 days at March 31 of '02 due to improved collections. The increase in DSOs in Q1 '03 compared to Q4 of '02 relates to variations in revenue linearity in the two quarters, that is to say revenue increased during the latter half of Q1 as is typical for Q1and revenue decreased during the latter half of Q4.

Net cash provided by operating activities came in at approximately $12 million for the three months ended March 31 of '03. Cash and marketable securities net of debt totaled $286 million at quarter end. Now I would like to discuss guidance for the second quarter of 2003. ADTRAN does not carry significant amounts of backlog from quarter to quarter as we remain in the book and ship business. As we previously discussed the first quarter's revenue is typically down from the fourth due to seasonality as we've just experienced. In recent years, the second quarter's revenue has been typically up from the first as customer order flows return to normal patterns in the second quarter.

As we look forward to the second quarter this year, I believe everyone would agree that there are uncertainties in the marketplace caused by geopolitical proceedings and the state of the economy. We must be cautious in our guidance in light of these uncertainties. Considering these factors we are estimating in the revenue in the range between $85 million and $88 million for Q2 of 2003. We are guiding gross margins for the second quarter in a range between 54% and 54.5% and operating expenses should be around $34.5 million for the quarter. Also we are guiding interest income net of interest expense to be in the range of $1.9 million.

Taking these factors into consideration and assuming shares outstanding remain the same as the first quarter, we are anticipating a range for earnings-per-share of 24 cents to 28 cents for the second quarter of 2003. We continue to see no indication that overall Enterprise IT spending is increasing thus we're forecasting it as flat. We do believe that in this environment ADTRAN will continue to gain market share in addition to seeing more significant volumes materialize from new products comprised of access routers, DSLAMS and other products. As we see continued market-share gains and continued traction on new products we are reaffirming our revenue guidance for the year to be between $360 million and $380 million. Optimal gross margins are in the area of 55%.

Being a book and ship business it is difficult to predict variations in product mix which could cause margin fluctuations quarter to quarter. For the year, 2003 where thus guiding gross margins of around 54%, operating expenses of about $36 million to $37 million per quarter for quarter's three and four and other income net of interest expense of about $1.9 million per quarter. This results in earnings-per-share in the range of $1.10 to $1.25 for year 2003. Mark, back to you, sir.

All right, Jim. As you have seen, while the first quarter is always seasonally weak for our company, we maintained our revenue near the high-end of our prior guidance. Earnings again exceeded our expectations, Rising 145% from the same period in 2002. Our new products being led by our access routers, DSLAMs, and optical access products continue to gain traction. Production deliveries in all three areas continue to grow with new customers embracing these ADTRAN designs.

We continue to gain market share with our latest products. During the quarter, a three year solar source contract was signed with the second RBOC for the supply of our complete line of HDSL products. We feel as Jim's previously explained that IT spending is holding flat at historically depressed levels. ADTRAN is currently positioned as one of the very few sound and profitable suppliers in this challenging environment.

With the solid position in both enterprise and carrier network access markets, the company's well-positioned to leverage the return to normal levels of capital spending. That is a condition that we anticipate. Of course, we'll occur, our problem is that we have no idea, as does anybody else, when capital spending will return to more normal levels and normal trends. Tricia, at this point we'd like to turn the meeting over to the question-and-answer session and see if we can answer anyone of the three of us questions from the people that have called in today.

At this time I would like to remind everyone in order to ask a question, please press star 1 on your telephone keypad. If you are using a speaker phone please pick up your handset before asking your question. Please hold for your first question. Your first question comes from the line of Alkesh Shah with Morgan Stanley.

Yes, thank you. A couple questions, then a bookkeeping question. First one, Mark, on the new products are you still holding to have the new products represent about 10% or more of revenues by the end of the year? And then in terms of traction that you're seeing, and then second, Jim, maybe on the gross margin, you did the first quarter has the price reductions that you look out towards the year and place in. The gross margin was pretty good this quarter. Are the price reductions embedded in here, is that how you're able to get flatter gross margin guidance and are their cost reductions associated in that offsetting from the price reduction. And the final bookkeeping question is, what was the headcount at the end of the quarter?

Mark, do you want to start?

Let me start. To bring maybe, goodness -- to bring everybody up-to-date on the estimate of the 10% of revenue associated with new products, I'd like to sort of explain that. What we have is three very exciting product areas which we've described. We would like to see in excess of a 5% revenue associated with each of these product areas. However, under the circumstances, what I have said in the past was that although I would set as a goal and would expect to hopefully achieve 5% over our revenue, with these three areas, that being practical and realistic, I would be satisfied with a 10% overall.

To answer your question is that 10% still appropriate? At this point I would say yes, but I would say yes, that the range might be higher rather than lower in that we are very, very pleased with the revenue that we saw coming on board in the DSLAM area especially in the first quarter and also we're seeing as we have said the attraction with the other two, especially the access router being strong so at this point I would not want to raise that 10% but I would think going forward that we have a much better chance of raising it rather than lowering it. As far as the gross margins I'll let you take that one, Jim.

Sure as far as gross margins, Alkesh, we came in at 54.6%, as I mentioned,. Obviously all the currents pricing is built in to come with up with that margin. Obviously I have not guided or can really predict pricing decreases going forward. But based on our history, we have been able to cost reduce, given our capabilities in order to stay with or ahead of any potential price decreases going forward. In regards to headcount, we're at 1,564, slightly ahead or over year end head counts. Much of that has to do with the ebb and flow of our co-op engineering population coming through the business. We had a new class begin in January as the former class completed before the holiday which tends to reduce our headcount at year end.

Thank you.

Thank you. Your next question comes from the line of George Notter with Deutsche Bank.

Hi guys, thanks very much. I wanted to bring up something you mentioned right at the end of the monologue there, you mentioned a three year sole source contract with a second RBOC. I assume it's for HDSL equipment.

Yes, it is.

Got it. Any sense for what your market share in that account was prior to you signing this contract?

Well, it used to be 50%. Over the last three or four months, it has slowly increased towards the hundred percent level, and what happened then during the first quarter was that this contract was signed over -- as a sole supplier for the next three years and that just confirmed in writing what had really occurred over the prior three--month time frame.

Got it. So is it fair to say that when you look at your Q1 results you had a hundred percent of that particular carry HDSL purchases.

For the majority of the quarter, that is correct.

I'm sorry, for the majority of the quarter?

That is correct, yes, that would be in there, and that contract ensures they will stay there.

Got it. And then also getting back to the gross margin discussion, I'd love to chat about some of the new product cost reductions you might have underway in a little bit more detail. I know that you guys are working on a HDSL four product cost reduction, any update on where that is?

We have in the HDSL area and especially in the 4, is a number of cost reductions and, quite frankly, they're at this point our most overlapping because of the number of different HDSL products that we have out there. So the best thing I can really tell you, in the HDSL area especially, is that the cost reductions are an ongoing basis by products as new chip sets and new designs are implemented at lower costs. The same type of things except not so constant and dramatic is happening, of course, across the entire product line.

We have an approximately 40% of our 370 some engineering design staff working on existing products and primarily bringing that new generations that should be at lower cost and so it's an absolute constant type of process that is going across the entire product line. I really don't anticipate that the point any stiff functions in the product cost reduction area such as we had here about a year ago with HDSL. So going forward I think you're going look at that as an incremental positive change.

Got it. And then last question. Any commentary on T1 line growth. Looking through the market-share gains in the quarter?

If you look at T1 line growth it still to me looks like it's basically flat. I just don't see any line growth or decline. It's just sort of flat phenomenon with, of course, the seasonality that you always see in the first quarter.

Thanks very much.

Thank you. Your next question comes from the line of Todd Kaufman with Raymond James.

Specifically on the DSLAM business, last quarter's conference call you had indicated that you were in first office application and then on this call you said you're very pleased with how that DSLAM revenue came together in the quarter. Can you give any more color about that carrier's deployment of your product? And then related to that, I think last quarter you may have indicated that there were two other RFQ's that were proceeding along. Any status update on those two other RFQ's? Thank you.

The revenue that we discussed, it was not in regards to the RBOC that was in first office. That is still on schedule and is scheduled for the real production, we have shipped, of course, revenue to that RBOC. But the real significant type production shipments we have said for some time would be this summer. The revenue that we're discussing in the DSLAM area, however, was with other accounts, a number of them, that are starting to add to a revenue of very significant nature.

And we're looking forward, quite frankly, to the production start this summer of the RBOC that's in the first office evaluation which all of that is going very fine and is on schedule. It's just a matter of getting through that process which is about a six-month process. So it's even better than if that production would have been from the that RBOC we discussed. That's still to come. And Todd was there, what was the other half of your question?

The other half was I thought that there might have been two other RFQ's that you had indicated were proceeding along with regard to your DSLAM product offering. Any update on those RFQ's?

One, we were not successful in, Todd, and the other is ongoing.

Thank you.

Thank you. Your mechanics question comes from the time of Tim Bechter with Legg Mason.

Thank you. Just a couple accounting questions, I was wondering if you could talk about the SG&A and why that went down the way it did from fourth quarter and what caused the R&D increases, is there something special going on, something new going on in the R&D line and lastly, if you could talk about share account guidance for the remainder of this year, can you talk about that?

In regards to share account guidance, I'll tell you that one first. It's very difficult for us to do that, Tim. The share account, the fully diluted share account did go up for the fourth quarter, and it was driven by an increase in our average stock price for the quarter as compared to prior. This increase in stock price brought in to play some option grants that have been issued in prior years. Okay? So really it's going to be going forward driven by our stock price or average stock price on a quarterly basis as to how many of those option grant shares will be brought into the calculation so that's very difficult to predict.

So the majority of what you saw this quarter in the way of increased share counts had to do with options that were issued previously, not in this quarter?

That is correct.

Okay.

In regards to expenses, what we try to do is guide as best we can. There are going to be fluctuations from that guidance. But we try to keep it pretty close in total. There's really no significant driver, one significant driver in the variations of those amounts, Tim.

So as far as R&D is concern there wasn't any new project that was started in the quarter?

Not particularly, no.

Thank you.

Thank you. Your next question comes from the line of Tim Slevin with Parker Hunter.

Okay. I just picked up the line. Sorry about that. In terms of the DSLAM accounts and the types of applications, are those typically quite low-lying count applications at this point? And much in the area of remote terminal applications?

Tim, yes. That's where we originally positioned the DSLAMs, the two versions that we offer. However, with the success that we're having with the initial installations, we are seeing our customers start to move our products into offices with a higher line count than we previously assumed and to ask us to provide additional types of feature sets allowing for the chaining of more chassis together to give a higher concentration of lines.

One of the advantages we have with our hardware is it's low power consumption. And so if you take a look at our hardware and think in terms of the absolute maximum that you are allowed from a power standpoint to dissipate in a 7-foot rack, it turns out that we have the highest line counts and highest density of any pileups out there that you can put in a 7-foot rack in a high-volume CL. And so really where we are finding is that once we're getting an out in the field and seeing, and our customers are seeing the performance, they're starting to consider using our DSLAM in not just areas where it's a couple hundred lines down, but starting to think in terms of chaining the chassis in higher line count applications.

That's great. In terms of the deployments those have been to independent Telco's principally, I would assume based on your comments.

Independence and ISC's.

Great. And in terms of your comp, to move to a new subject, in terms of your confidence regarding gross margin continuity, would you say you had a greater confidence in maintaining above corporate average or above 50% margins over a sustained period of time now than you did say in the third and fourth quarters?

Yes, we had, if you look back over 2002, a pretty severe incremental increase in gross margins in that third quarter. We felt that we were certainly on track but we were concerned that we might have got a little bit ahead of ourselves gross margin-wise when we saw this incremental increase in the third quarter. Time has passed and we have settled into this 54 to 55% gross margin range. And so basically at this point we don't see anything major sitting out there that should throw us outside that have range. However, the future is impossible to predict as we all know and our product mix, all kinds of things could affect us and get us outside of the range but we just don't see the thing that would cause that at this point.

To the extent, I guess you had some mix shift away from CSU/DSU's which may or may, I'm not sure what the margins on those would be versus systems or DSLAMs but it seems like you had some favorable margin or mix shift in the last quarter or two. Would that be correct?

The DSU/CSU's, those products had high margin items, and so we did not have a -- we shifted from that to a sort of across the board type of thing. That was not a positive from a margin standpoint. That was more negative.

Okay, great, great. And just two last questions regarding the modeling and accounting. I guess first off in terms of SG&A, do you all anticipate that there's much leverage or capacity leverage within that line item or do you expect it to start to trend upwards and remain, you know, achieve some benefits but remain relatively flat as a percent of sales as sales grow?

That may be a financial question.

Sure. I think it will be relatively flat, both SG&A and R&D.

In dollar amount.

Yes.

What he's saying is that the leverage that we have in both SG&A and especially in the engineering area is tremendous as we see revenue grow and capital spending come back.

So there's no major initiatives or -- on the drawing boards that -- you're covering most of the targeted areas at this point in time that you have I guess well from the standpoint of infrastructure.

Right from an Op Ex standpoint. Yes.

One last question, Jim, with respect to the upper-end of the income range do you expect to have any effective tax rate adjustment toward the end of the year if you do hit that upper end compared to the lower end?

Sure. We take a relook at that at mid-year and we may see towards the upper end of the guidance, the rate creeping up to say 30%.

Okay.

Essentially.

Great. Thank you very much.

Your next question comes from Tim Slevin.

All my questions have been answered. Thanks.

Your next question comes from Ester Cho.

Patricia.

Miss Cho, your line is open?

Let's go on to the next one.

Your next question comes from Tim Bechter.

Sorry I just lost that for you. I didn't know what it was, sorry.

Mr. Bechter?

Yes, is my line open?

Yes, sir.

Can you hear me?

Yes.

I want to follow up on Slevin's question regarding the DSLAM market. You answered his question about who the customers have been here so far were, the ISC's and the IXC's. Did I hear that correctly?

It would be the independents and the ISC's.

Okay, what about the RBOC's, you know, with the new rule that came down February 20th there's been a lot of attention paid to the [INAUDIBLE] side of it, but my feeling is the broadband side of it is somewhat unappreciated. Are you starting to see where the RBOC's are looking at growing the footprint and maybe using more of your product to get the smaller line counts areas and maybe some of the ones that you previously thought they wouldn't go after, are you looking at those too?

Yes, we are, and we're seeing -- and we think that the regulatory climate is going to be positive in at least the broadband area. The thing we're explaining in the RBOC area is that we are in an evaluation and final approval process with a major RBOC with our DSLAM. It is just about -- that entire process is just about complete. The contract terms have already been established for us to supply. It's just a first office application process that you go through on products such as this and it's about a six-month process and we're looking at the schedule that's currently being on schedule and probably a couple of months away from being complete and able to get into a full production basis. It should be quite significant for us with the first major RBOC customer. So the answer is that, yes, of course, we're working in the RBOC area as well as the ISC and independent area. It just takes longer to get started.

Am I hearing you right, Mark, that about six more months and you might start to see some revenues from an RBOC.

No, no, no.

No?

We've been in that process. We've already seen some revenue and what I'm saying is that the manufacturing process should start in about two months.

I see okay.

Not six, we've already been through this process for about four months.

Understood. Now with regard to your T1 HDSL market, is the rule with respect to promoting fiber utilization, is that seen as a negative or do you have some provisions in place to try to capture that market if there's any shift from use of T1 to some sort of fiber connectivity.

We, of course, have our fiber access, our object three product line that is aimed right at that fiber market. We do not think, however, that the real current effect is going to be that significant and certainly nowhere near as significant as the effect of the capital spending will have on the T1 applications. Yes, there's going to be more T1 that is supplied on fiber, but with the lowest fiber formatting standard of being OC3 at 150 megabits that is an enormous increase over the 1 1/2 megabit of a T1line.

Sure is.

And so we just don't see a very large calibersation of T1. We see applications where higher bandwidth is migrating, of course, to OC3. But I don't see it occurring any time soon in the T1from a fiber implementation.

Thank you, Mark. That was certainly one aspect. I'm more interested in how the DSLAMs and remote applications are being connected back to the central offices. Is there a move of a foot to use fiber in all those applications to get away from the EBT pricing?

I'm not sure, and don't ask me as an expert. I'm sure not on all those regulations because for all of them they really haven't been defined. But it would appear to me that whenever you have a DSLAM and you have the broadband that that in and of itself gets you out from the UNP application. Whether or not it's hooked up with fiber to the DSLAM. I think just the broadband aspects itself is adequate to get you out from that regulation.

As long as it uses pact technologies you're out of that as well. Thank you very much.

Okay.

Thank you. Your next question comes from the line of Rej King with WR Ambret.

Thank you. Jim, I was hoping first of all, I thought you can just give us any 10% customers you may have had, give us some idea of customer concentration for the quarter.

As far as 10% customers, Rej, they have not changed at all from our 10-K. SBC, Verizon and Sprint were and continue to be our 10% customers.

Okay. And Jim, can you tell us what proportion of the business those combine? Gave for the quarter. Or is that the same, approximately the same as the 10-K also?

It's very close to the same, Rej. There's no significant variation from the K. The K reflected SBC at 21%, Verizon at 14% and Sprint at 10%.

Okay. And Mark, you talked a good bit about the DSLAM products and the trials you have going on there. Can you give us some color on the router, what customer segments you may have seen some success with and then what's the ramp look like? I know you said it's been successful but can you give us some feel for the ramp pattern that we shall expect?

We are really seeing progress across-the-board and what I think the -- any kind of differential between different areas is just sort of the timing that it takes in some of the different areas to get the contracts underway and purchase orders going. But it is obviously still very, very early. We only introduced the product about five months ago. But we are installing now a major -- major accounts. And I couldn't really be more pleased with the way the thing is going. It is moving very well and the thing that is especially gratifying is that we are putting these products into the field, into customers' facilities, and we're absolutely not hearing back any problems at all. It is a very, very smooth new product introduction for us.

Mark, if I'm reading you right, it sounds like that two of the three prongs of the new products that you told us about, that you would expect would be 10% of the revenue for the year, are definitely going to be on track, the router and the DSLAM.

That is absolutely correct.

Great. Thank you.

Thank you. Your next question comes from the line of Andy Schopick with Nutmeg Securities.

Thank you, and good morning. A couple of questions. First of all, Mark, I wonder if you can comment on the approximate revenue percentage split of revenues between two wire and four wire HDSL at this time?

Oh, Lord. Jim, do you know?

Mark, I think it's -- it might be 40% four wire.

40% four wire. My follow-up on that one, is there any inherent underlying material margin differential right now between two wire and four wire shipments?

Yes, four wire has a slightly higher margin.

Slightly higher. Okay. And I would assume that that will continue at least over the course of the currents year?

Yes, we would assume so too.

Jim, for you. On the other income, you did mention foreign currency transaction benefit. I was surprised because you have such a low international component and I thought you sold primarily in dollars anyway. What gave rise to the foreign currency exchange gain and what was it, three, 400,000?

It was just over $200,000 and basically we had been accumulating unrealized gains with Australian dollars over the past number of quarters. We recreated those Australian dollars to U.S. and recognize that gain. We in effect really do sell U.S. dollars. We in the past refixed the rate on the monthly basis to catch up, so to speak, but we have been accumulating Australian dollar deposits which do give rise to exchange differences and we've benefited in terms of a gain at the repatriation of those funds.

Any other geographies where this could happen where you're selling?

No, at this point no. To a very, very smaller extent of Canada perhaps but that would be really insignificant.

Okay. Last thing on the balance sheet, Jim, in long term investments, I see they declined from the year end balance of $176 million to $158 million.

Right.

I think last quarter you indicated that marketable securities $26 million and a private investment of 800,000. Could you tell me again what the marketable securities component of that is?

Right. Marketable securities component of that now is $22 million, okay?

And that includes a private equity investment?

Of roughly about $800,000, yes.

Thanks.

Thank you. Your next question comes from the line of Ryan Thibodaux with Maple Leaf Partners.

I was wondering if you can go to some of the reasons for the increase in AR on the balance sheet?

Ryan, we can't hear you.

Can you hear me now?

Much better.

I'm sorry. Wondering about the increase in the accounts receivable balance.

Right.

If you can go into that a little bit.

Sure. Yeah. We did witness an increase of about $10 million in accounts receivable from December to March. That increase really is driven again by the linearity of revenue in the first quarter. Typically in our first quarter coming out of the holiday season, January is typically very low from a revenue standpoint and March much higher. And that was very consistent with the first quarter of last year as well. We did result at 51 days DSOs for the first quarter versus 60 in the same quarter of the prior year. Again due to improved collection.

Also, the fourth quarter was at 41 DSOs which was a little lower than typically what we've run through 2002. And that is due to again linearity within the quarter. October month was higher than December, okay? So that would drive DSOs down.

And one other balance sheet question. Was the long-term debt paid off this quarter?

No. That long-term debt of $50 million relates to a development bond that the maturity is way out.

Okay. Another question would be were there any stock buy-backs this quarter?

No.

And last quarter you had guided for operating expenses on a per quarter basis to be around 34 1/2. I'm sorry, 35 1/2 per million per quarter. Was that -- would you revise that upward 36, 37 is that correct?

36 and 37, yes, be would be for three and four is our estimation there.

Is there any reason for the increase?

There is a small component of variable that runs with revenue as we do anticipate revenue increasing in quarters 3 and 4.

Okay. Thank you much.

Thank you. Your next question comes from the line of Gina Buckelo with Buckingham Research.

Thank you. Can you discuss the revenue break out in terms of customers and then the gross margin in terms of products, what percent of revenue, any 10% customers and what their total contribution was? I know you break it out in the K but if you could break it out quarterly and what you break out in the K do on the quarterly basis of gross margin on each business? And lastly, can you discuss if there was any change in component pricing? Thank you.

Gina, as far as the gross margin break-outs by divisions, that will be available in the Q. As far as our see let revenue of total we were at 17% in the first quarter. And as far as our larger customers, they were -- our 10% customers did not change from the K. And also the percentages of each individual customer, 10% customer did not change materially. The K stated SBC was at 21%, Verizon at four tone% and Sprint at 10%, okay? And again, the gross margin data details will be disclosed in the Q. Did I answer all your questions there, Jena?

Gina, has withdrew her question. Your next question comes from the line of Michael Perica with Kaufman Brothers.

Thanks and good morning everyone. I have a question on the total access 3,000 platform follow up on prior discussions on T1 trends, the two parts. Of the first part, what's mixture you're shipping with the traditional HDSL TDM functionality versus the DSLAM functionality. And if we took the HDSL part of the total access 3,000, bundled it with the traditional HDSL T1 business, what would have been the sequential trend? Thanks.

I'm afraid I didn't totally follow all of that. To start with, let's take the 3,000 for the rest of the folks that are on the call. Explain that this chassis, this system's chassis has a multiple line of technologies that can be applied to it. The conversation here, the two of the most important would be, of course, HDSL and also the same chassis can be used as a DSLAM, therefore, having a DSL supplied to it. Now in addition to that, that's on the line side. On the access side. On the CO side, this system now has a number of different interface capabilities, primarily ATM or TDM.

So what we have is a very flexible platform and the question is to try to break out the different components of technology from a revenue standpoint in the quarter as it would relate to this overall system, and that's where I don't have the numbers in front of me. I'm sorry, to be able to do that in a thorough manner, but let's go in generalities and we can say the following. That due to the volume that we have, of course, with HDSL, and the time frame in the market share that we have with that that technology that the majority of the revenue associated with our total access 3,000 is associated with supply and HDSL. The ADSL or DSLAM portion of that is growing nicely.

When you look at the HDSL, you will find that that primarily is a TDM type of interface into the CO, and when you look at the ADSL or DSL to the home then you're going to find that that primarily is an ATM and so that really is the breakout with at this point in time the HDSL being the largest components by far and with the DSLAM activity though coming on strong and growing very robustly.

Mark, if I can follow quickly, are any of your RBOC customers taking the DSLAM and ATM functionality?

Yes, except as we have been talking, that is still coming. And, so we're not into volume revenue. I was talking strictly about current volume revenue.

Right. If I can confirm the answer, are these -- I'm talking about RBOC customers that are taking this functionality into total access 3,000.

That's correct.

Okay. Thank you very much.

Thank you. Your next question comes from the line of Nikko [INAUDIBLE] with UBS Warburg.

With the new market share of RBOC, what do you estimate your total share is now in the U.S.?

Nikko, this is Mark. Somewhere between seven and 75.

Moving back to the DSLAM, can you say how many revenue generating customers including this RBOC you actually have for the product line right now?

As I list this morning it looked like 12 except that was the top 12 and so as far as the total number, Nikko, I don't know.

But greater than a dozen?

Yes.

Okay. And you said on the call obviously this [INAUDIBLE] with the RBOC moving along and so forth, at some point I heard you say there was one opportunity with an RBOC that there was a bid and you're no longer being considered on the bid. Did I hear that correctly or was that referring to another product line?

You heard that correctly. We're still being considered but the question was in a specific RFQ that we were not successful in.

Okay. And just two other quick questions on that product. Is there any configuration of this product or another product you have for remoting the DSLAM out into the outside plants?

Yes, in fact, the TA 3,000 as well as our TA 1,200 are both specifically oriented towards being able to do that. They're both hardened and both of the size that fits very nicely in the remote cabinet. The prime application is in the remote units and in the medium to smaller CO's except that one discussion I was having with the gentleman was the fact that we're now seeing, due to the lower power consumption of our product, we're seeing some customers start to think in terms of using it in much higher densities than what we had really planned.

The initial design or focus was outside plan, but you're seeing interest in CO applications due to the power consumption --

That's correct.

And one last question. Is this product designed and being marked for the international market as well? Or is it primarily at this point only U.S. focused?

It is being marketed internationally, primarily in Asia.

Is that being done directly or how are you doing that?

We're doing that directly.

Thank you, Mark.

Okay, Nikko.

Thank you. Your next question comes from the line of Eric Burk with Catavan Advisors.

I wanted to ask kind of a broader industry type question and that is as you look at the overall RBOC or telco-spending and spending on your products, is it your sense that the current run rate of demand reflects the actual in demand in capacity requirements or is there still excess plant capacity at the RBOC being consumed and so you're really running below the end market demand rate?

Eric, with the access equivalent that we supply, the RBOC don't order the stuff until they have requirements to use it. So we never end up with a excess inventory type of situation with one exception. And that is that people that sort of horde on an individual basis will put cards in some of our products in their trucks that they have, repair trucks. They have some of our products in the CO's, remote CO's that will be not being currently used and we see about every four or five years, then the RBOC's would tend to all get into a let's go out and clean out the trucks and clean out the COs and get everything back into the store room. That process we saw about three years ago, but as far as excess capacity being built up in the types of access we make, we never really saw that.

Even there isn't a third party company that has gone out of business over the last couple of years and their equipment going into the marketplace and creating some overhang?

Eric, I just haven't seen that as a --, of course, as the reseller marketplace is always out there, but in the types of stuff we -- that we ship, I haven't seen that as a significant factor in anything we do.

Okay. So the to get a kick up in the revenue run rate beyond what market-share gains or new products will contribute that will have to come from an actual turn in the economy as opposed to summing up excess capacity?

In our legacy products, that's exactly correct.

Okay. Thanks.

Thank you. Your next question comes from the line of Ben Laing.

Ken Laing here, I was looking for clarification on one thing with regard to your HDSL T1revenues, you were talking about getting a hundred percent of the business from one of your RBOC customers up from 50% and I'm curious then how your HDSL T1 revenues declined from $43 million in Q4 to 37.7 for Q1? And I'm also curious how then the mix in terms of your business of your top 10 customers would have stayed exactly the same?

The reason for both of those is that the decline was in DSU/CSU's which is a hardware, sold by an enterprise division and basically was not sold at all to the top 3 customers.

Okay. So wasn't sold to SBC, Verizon or Sprint?

No, they're sold into the enterprise marketplace, not into those carrier class customers.

Thank you.

Okay. Let's have one more question, I think we're just about coming up on our hour.

Your next question comes from the line of Joanna Marcus with Adam Harkness and Hill.

I apologize if you answered this question previously, but there has been a lot of talk about RBOC's moving toward the Telco hard and mini DSLAM approach, adjacent to their remote terminal as a way of stepping up their DSL deployments in anticipation of this final SEC document. In your discussions with the RBOC's, are you seeing any increased interest in this approach.

You're using different words than and times than what I'm used to here. You're saying stepping up -- start that question again for me please, ma'am.

There's been some discussion about the RBOC's implementing a mini DSLAM adjacent to the remote terminal as opposed to deploying a digital loop carrier like BellSouth in anticipation of stepping up broadband deployments prior to this written SEC document which appears to be causing some uncertainties. Are you seeing the RBOC's demonstrating any heightened interest in this approach.

Yes, we are except that I really don't think that has to do with the uncertainties in relationship to the regulations. I think it has more to do with the efficiency of doing that. That is one of the reasons that we brought out our DSLAM total access 1200 series was to allow just that particular configuration to be used . It's my opinion that the regulations are probably going to be pretty much the same so long as there is a broadband component being supplied and I don't really think that it's going to make much difference whether that is in a stands alone chassis or part of a DSLAM. I may be wrong about that when the regulations come out.

I think the stand-alone approach would be cleaner and more difficult for the regulations to try to mess up. That's usually what regulations do. But, yeah, we are seeing certainly a lot of interest in that mini DSLAM area and certainly in our total access 1200 taking benefit of that interest. But once again, I'm not convinced that it's solely due to the regulation environment. Did that answer your question?

It does. Thank you.

Okay. At this point in time, I think we've had the call for over an hour and we've answered it seems like just about everybody's question. I certainly do appreciate the large number of people that we had on our call this morning. I appreciate your interest in ADTRAN, appreciate your participation and stockholders in our company and look forward to our next conference call in three months to be able to keep you updated as to the progress of ADTRAN and so thank you very much for being on the call. It will be a pleasure to talk to you again in the next call in three months.

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