ADTRAN Holdings Inc (ADTN) 2004 Q4 法說會逐字稿

Good morning. My name is Wes and I well be your conference facilitator. At this time, I would like to welcome everyone to the Adtran fourth-quarter earnings release conference call. (Operator Instructions.) . 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 costs, manufacturing efficiencies and other risks detailed in our annual report on form 10-K for the year ended December 31, 2004. 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, our Mr. Mark Smith, Chairman and Chief Executive Officer, and Mr. Jim Matthews, Senior Vice President and Chief Financial Officer. Mr. Smith, you may begin your conference.

Thank you. I would also like to welcome everyone to the fourth-quarter Adtran conference call and thank you for taking time out of your busy schedules to be with us this morning.

As you have seen in our press release this morning, the company grew revenue in 2004 to about 15 percent to 454.8 million and we grew earnings by 23 percent to 93 cents per diluted common share in 2004. Most of the sequentially -- sequential quarter on a revenue and earnings in the fourth quarter were down, however, but in line with our previously announced guides. From the fourth quarter of 2003 through the second quarter of 2004, the company experienced a revenue growth of 40 percent.

The second half of 2004, however, has experienced weakness in bookings across the company's product lines. We believe that the underlying demand for bandwidth, which is the source of demand for our products, continues to grow. Approximately 85 percent of the company's revenue is derived from the increasing bandwidth required by business, both large and small. The remaining revenue is from resident -- residential DSL and carrier capital spending for a service footprint expansions. While both increase in employment and bandwidth intensity of applications with both increasing, we believe that this growing need for the company's products will serve us well during 2005.

At this time, I'd like Jim Matthews, our Chief Financial Officer, to provide you with a more detailed analysis of both the fourth quarter, our 2004 results, and our guidance for 2005 for the first quarter and the year as a whole, which is our standard practice. So, Jim, if you would proceed.

Thank you, Mark, and good morning, everyone.

As disclosed in the press release, revenue for the year was $454.8 million, up 15 percent from $396.7 million in 2003. The increase in revenue was driven by a 65 percent increase in new product revenues and a 7 percent increase in traditional product revenues. New products comprise DSLAMs, Optical Access, and the NetVanta range of enterprise products. For the year, systems revenue was 217.3 million, up 27 percent from the $171.6 million in 2003. This increase was a turbo to the increase in new product revenues and an increase in M 13 multiplex revenues. HDSL/T1 revenues was $215.5 millon, up 12 percent from $193.2 million in 2003. This increase was primarily the result of continuing market share gains. DBT total reach was $22 million, down from $31.8 million in 2003.

This revenue category was down as customers continued to migrate to applications requiring higher speed connectivity. Fully diluted earnings per share for the year was 93 cents, up from 76 cents in 2003, reflecting a 23 percent increase in net income for the year. Revenue for the fourth quarter was $104.9 million, down from $113.8 million in Q4 of '03 and down from $115.3 million in Q3 of '04. Carrier networks division revenues were $76.1 million in Q4, up from $74 million in Q4 of '03. Comparing Q4 of '04 to the same period last year, the increase in carrier network division revenues was due to an increase in new product and M 13 multiplexer revenues, partially offset by decline in legacy products revenue. Enterprise networks division revenues were $28.8 million in Q4, compared to $39.8 million in Q4 of '03.

This decrease is attributable to a decline in sales of enterprise DBT products, CSU/ DSUs and integrated access devices partially offset by an increase in NetVanta product revenues. The decrease in sales of integrated access devices primarily relates to a former customer who seized business in the second quarter of 2004. We believe that integrated access devices will continue to be a long-term growth business for the company, and we anticipate continuing market share gains in this area. Revenues in both divisions were down sequentially for the fourth quarter, due to a general weakness in bookings in the quarter. Management believes the weakness in bookings is attributable to a pause in spending for business connectivity and central office DSLAM products.

We believe the pause in business spending will resolve itself as macro economic conditions continue to improve in terms of employment and IT spending, which will continue to fuel demand for bandwidth. We believe the pause in DSLAM spending will resolve itself as carriers continue to aggressively promote traditional DSL services. For the total company, the HDSL/T1 product category revenue was $51.4 million for Q4, of '04, down from $56.4 million in Q4 of '03. This decreases is primarily related to a decline in CSU/DSU revenues. Visible business transport total reach was $4.3 million in Q4 of '04, down from $8.6 million in Q4 of '03. Systems revenue were $49.2 million in Q4 of '04, up from $48.9 million in Q4 of '03.

The slight growth in systems revenue was the result of an increase in new product revenue, partially offset by a decline in traditional products revenue. Revenue from the international sector for Q4 of '04 was approximately 9 percent of total income. Revenue from the international sector for the year was $30.6 million, up 56 percent from $19.6 million in 2003. The increase in revenue relates primarily to sales growth in Australia and Latin America. Gross margin was 56.5 percent of revenue during the fourth quarter 2004 compared to 58 percent for Q4 of '03. The decreasing gross margin percentage is primarily the result of a decrease in higher gross margin enterprise networks division revenues. Research and development expenses were $17.8 million in Q4 of '04, compared to $15.2 million in Q4 of '03. A significant portion of this increase over last year relates to Telcordia expenses for Optical Access products and in acceleration of Telcordia expenses relating to recent DSLAM successes.

Selling, general and administrative expenses were $23.4 million for the Q4 of '04 compared to $22.1 million for Q4 of '03, a significant portion of this increase is due to professional services related to Sarbanes-Oxley implementation and increased insurance costs. Other income, net of interest expense, was $3.1 million in Q4 of '04 compared to $1267894 million in Q4 of '03. The increase was primarily related to the sale of the company's interest in a private company, realized gains in foreign currency transactions and higher interest rates earned from fixed income securities.

Our income tax rate for the year was 31.7 percent. This is a decrease from nine months ending September 30, '04, tax provision rate of 32.1 percent. The change in our income tax provision rate for the year was primarily related to firming up 12-month estimates based on actuals for the year and resolutions of various federal and state tax contingencies. These adjustments in the 2004 tax rate resulted in an income tax provision rate of 30 percent for the fourth quarter. Earnings per share assuming dilution for Q4 '04 were 19 cents compared to 26 cents for Q4 of '03.

From a balance sheet perspective, inventories decreased $1.3 million from the prior quarter to about $42 million. Net trade accounts receivable decreased $700,000 to $63.7 million. DSO's came in at 56 days, up from 51 days at the end of the third quarter. The increase in DSO's was due to the linearity of revenue in the quarter. Net cash provided by operating activities came in at approximately $27 million for the three months ended December 31, '04, and $86 million for the year. Cash and marketable securities net of debt totalled $298 million at year end after repurchasing $3.3 million shares of common stock during the year for $81 million, and paying $25 million in dividends during the year. A balance of 1 million shares for repurchase remain on the 4 million share repurchase program announced last April.

Now, we would like to discuss guidance for the first quarter and for the year of 2005.

As most of you know, we are book and ship business, therefore we typically carry very little backlog from quarter to quarter. This factor makes the process for providing meaningful guidance extremely difficult. As we said in our earnings release, even though we experienced 15 percent year over year revenue growth in 2004, we saw a pause in our markets in the last half of '04. In 2005, we believe this pause will resolve itself as employment and IT spending will continue to expand, and as we anticipate carriers will continue to aggressively promote consumer broadband services. With that said, as most of you know, our company has a history seasonality in the first quarter, and we believe that seasonality is primarily related to weather.

Therefore, we are guiding revenue for the first quarter of 2005 to a range of $98 million to $104 million, and earnings per share to a range of 15 cents to 17 cents. For the year 2005, we are guiding revenue to a range of $455 million to $485 million. We anticipate quarterly revenues will ramp during the year. We anticipate DSLAM's will continue to lead new product revenues 2005. With outside plant and remote terminal of DSLAM's riding the larger part of the growth in the DSLAM category. New products comprised outside plant and central office DSLAM Optical Access products in our NetVanta range of products. We are guiding earning per cent for the year to a range of 90 cents to 96 cents, before the effect of implementing stock option expensing related to FAS 123-R. Most people are aware of the upcoming requirements for implementing stock option expensing relating to FAS 123-R. The required effective date for this implementation is the beginning of our third quarter this year.

Therefore, we will expense stock options in the third and fourth quarter of 2005 and going forward. We are guiding an impact of earnings per share of 5 cents to 6 cents for 2005 for implementation of FAS 123-R. Mark, back to you.

Thank you, Jim. At this time, we would like to go ahead and get to the question and answer session, Wes. So if you could take the questions as they have been been given, why, we'll go into the next session.

Thank you, sir. Operator instructions.

Your first question comes from Rich Church of Unterberg.

Thanks and good morning.

Couple of questions. Could you give us the breakdown on what new products were for the fourth quarter? Can you break it out by DSLAM, NetVanta, and the Optical Access?

Rich, this is Jim. We haven't provided that in the past, but what we have provided is a percent of revenue of new products to total revenue, and for the year of 2004, we're at 19 percent. Now, as far as the relative rating within that 19 percent of total revenue, DSLAM continues to be the largest contributor, followed by Optical Access, followed by NetVanta.

And could you give us an idea for '05 where you expect new products to be as a percent of total revenue?

Rich, we are hopeful that it will increase, and that is - that is the amount of granularity that we're providing at this point.

Okay, and with regard to the upcoming DSLAM projects that you have alluded to, one of those customers has been a traditional CO DSLAM purchaser, and they are moving toward outside plant. Do you expect the outside plant deployments to replace the demand for CO deployments at that particular carrier, or do you think that the CO-based stuff will continue in addition to the outside plant?

This is Mark Smith. What we really anticipate there, related to, this will be new applications adding to the applications that we've had in the past.

Okay. Great. Thank you.

Your next question comes from George Notter of Jefferies & Company.

Hi, guys. Thanks very much.

I guess I would love to just walk through sort of your confidence levels in terms of the business bouncing back on a going-forward basis, and certainly, I think, we all agree that IT spending will get better and demand for broadband services will improve and my question, though, is did you see any kinds of inventory issues, kind of running through, you know, Q3 and Q2 of '04 into Q4? Is there any kind of snapback we might see looking forward, as maybe customers on the HDSL business or other parts of the company, you know, again, maybe had a little bit too much product for one reason or another coming through the back end of the year and maybe, you know, normal run rates of the business, you know, would potentially be higher than maybe some of the level you announce heard in Q4? Is that - is that kind of inventory correction piece factor at all into your expectations that business trends will get better or is it just purely the discussion of economic improvement going forward?

George this, is Mark.

There is a portion of that that is inventory-related and, in our opinion, that is the primary product area because it really depends on product area when you're talking about inventory. And we think that- that related to some DSLAM weakness in the second half. But it is very difficult to attempt to try to isolate the many positive inventory that you have within an RBOC and so the inventory effect is there. We think-- and we do believe that we're going to get some inventory snap-back relief. However, I would say that that's less than half of the overall. I think the largest effect that we see was just a policy in spending. And part of the reason that we say that is that we have visibility, obviously, into both the enterprise spending, as well as the carrier. And so in the white-area environment, we saw the identical type of slowdown in the second half in enterprise, as well as carrier, and that leads us to believe that it's a -, not an inventory, but a pause in the spending level for wide area bandwidth.

Got it. And then last question, just on the guidance for Q1, the $98 to 104 million, question is, you know, what's kind of driving that guidance? Obviously, seasonality is the big piece of that, but, you know, wondering if you guys are expecting any of the new outside plant DSLAM revenues to start coming into the revenue stream with new customers in Q1. Is that factored into guidance and then, you know, also it certainly looks like Q4 didn't benefit from any kind of seasonal uptick or year- end spending budget flush. So, is it therefore logical to believe that Q1 would see a seasonal step down off of a Q4 that didn't see the benefits of seasonality?

You've got two things going there, one positive and one minus. Or one neutral, let's say. The outside plant equivalent here, you're really talking about, that may be some revenue at the end of the first quarter, but I tent to doubt it. These types of things usually slip a little bit. And so I anticipate that that would not be a first-quarter event, but that should be a second- quarter event.

Okay.

The comment you have concerning the lack of the robustness of the fourth quarter and, therefore, one would not anticipate seeing as large a decline for seasonality. I definitely agree with that, and I think that that is a potentially a pretty good positive. What we have done, however, is look at the seasonality and relate that to our fourth-quarter run rate. As you can obviously see, coming up with the guidance that we have, and that is the best information that we have at this point in time, as you well know, with our limited backlog of visibility. But on the overall basis, we sure don't pretend to be able to tell anyone here. When we anticipate to see the demand become more robust from a timing standpoint. But, we definitely think that's in the cards, and we don't see it that long off.

Okay. Thanks.

All right.

Your next question comes from John Anthony of SG Cowen.

Good morning, guys. A few questions here.

On the DSLAM revenue, just kind of looking at it from a customer standpoint, can you tell us currently how many customers you -- I guess, generate meaningful sales from, when it comes to DSLAMs?

John, that would be quite a few. Jim, do you have any kind of number? I -- I really don't.

I, I don't.

But RBOC's specific though?

Generally for RBOCs, now you got real specific. And so, it of course, is lumpy and depends on the quarter, but I would-- I would -- we're shipping to some to all of them. Revenue, very large, would be one.

Okay, and by the end of the year, just to get a sense of your conviction level, how many RBOC's do you think you'll be generating meaningful revenue from-- with sales of DSLAM's, regardless of the actual DSLAM product?

Well, I would hope for, but I would be disappointed if it was less than three.

Okay. Another quick question on the HDSL side. What do you think the drivers are going to be? Can you rank the drivers this year? i mean is it going to be primarily return to enterprise, or how much of an impact will increased wireless spending having from the likes of EBDO and some of the 3G buildout?

All right in my personal opinion, it's going to be primarily the impact from enterprise spending and bandwidth expansion.

Okay. So any benefit from wireless would be somewhat incremental to your outlook then?

Yes, it would. And the wireless activity we saw in the first quarter, second quarter, some in the fourth quarter of the prior year, its contribution is very difficult to say because it's the same customer based on the same product. However, I really tend to feel that it was a -- it was not an overly significant part of the increase in demand.

Okay, and last question. From a product road map standpoint, when do you expect to have, I guess, the next sequence in outside plan and remote terminal DSLAM's made available? Specifically, products that you feel would fit into more of a either FCTN or FCTC- type architecture?

Prototypes and preproduction units are available now. And it's a -- it's an ongoing systems type of activity.

So commercial shipments could begin, if there was demand, commercial shipments could be made available by the end of the year?

Oh, yes.

Okay. Thanks, guys.

Your next question comes from DeVic Area of Merrill Lynch.

Good morning.

Mark, I'm curious to know how much of a factor is reuse of existing equipment. I know we discussed inventory before, but how much of a factor is reuse of existing IAD.'s Because even if employment picks up, what should say the carrier would will not reuse existing, you know, HDSL cards or IAD equipment.

Okay. The IAD we have seen, that as being almost nonexistent. And the reason is, that it is installed in the field and the cost to go out and get one far exceeds the cost of the product itself. So, we just never see reuse of IAD's. HDSL is a different story. As are the legacy cards and the legacy systems that we have, and as we have explained in the past, what happens there when service is discontinued, the normal action is to simply unplug the card, but leave it in the same chassis. And then when additional service in the same CO, or in the same remoter area is initiated again for different customer, let's say, then they usually carry a new card out to that CO to be sure that they have one, and you have a buildup in the CO's and of inventory of the cards. Periodically. these -- a program is developed by the RBOC to go out and collect all these unused cards, bring them back, and put them into the stockroom again. That being really the RBOC reuse program. We think we saw a good bit of that with one of the larger RBOC in the HDSL area during the middle of the year. It is a factor, at this point in time and going forward, I do not see it as a major factor. I do not believe it was a major factor in the weakness that we saw in the fourth quarter either.

I see. And new products, if they were to look at-- you know, if we assume that new products will ramp up in 2005, which I think is a reasonable assumption, given that your new products, the bulk of that is DSLAM's and optical multiplexes, which are going in a carrier environment , and that your carrier margins are lower than the enterprise margin, I'm curious to know how your overall gross margin evolves as new products start being a bigger part of your revenues?

Okay. About half of that is on the target and let me try to explain the other half. All of our new products, just in general, have higher gross margins than our older products, and the reason for it, is that new generations of any product that is a recent design just tends to have the latest technology in it, which is normally cheaper than older and is more competitive. So the entire new product category, as a whole, has better margins, and so an increase in new products in relationship to the total company should increase our gross margin. As your comments versus carrier and enterprise are concerned, you're absolutely correct. That the enterprise market area normally carries higher gross margins, but also, by the way, carries higher SG&A. Now, we saw a dropoff, as you noted,, in the percentage of enterprise product sales and revenue in the second half and that, of course, did have an effect on the margins. As that product mix shifted over to the carrier, which, as we said, has a little bit less margin. As far as the optical and DSLAM, we don't need to forget the tremendous growth we're getting in NetVanta products. These are doubling year over year. We never expect new products to take off in a straight enormous increase. If we did, we would have very large expenditures on the front end of SG&A. The way Adtran works, however, is to be profitable as we go along the way, and not have enormous amounts of infrastructure spending prior to generating revenue. The net of that is that we don't have the big enormous early ramp. What we're seeing, though, is that in anticipating, if we can continue to double our NetVanta sales activities on a year-over-year basis, then we're going to have a very significant enterprise revenue base and should not be looking forward -- too concerned about that enterprise carrier mix.

I see. And one last question, is what was the EPS impact, if any, of foreign exchange effects in the quarter? Was it 1 cent, or , you know, was it not as meaningful?

DeVic, it was about $200,000.

Excellent. Thank you.

Your next question comes from Jason Ader of Thomas Weisel.

Good morning. Mark and Jim, you talked about this pause in spending ,and, you know, kind of general in your comments there. The question I have is we really-- I don't think he we saw a great pause in spending across other vendors. So it seems like it's somewhat specific to Adtran. So could you, you know, maybe speculate on why you have seen this pause and maybe some others haven't?

I think, Jason, probably one of the reasons is that the comparative examples that you may be looking at probably didn't grow 40 percent in the six quarters prior to this, you know, this last two quarters. So, when we look at it from an overall basis, I think our comparisons to our peers turn out to be pretty good. We have-- we talked to a number of people, and looked at a --, all of the information that we can come up with, and it just appears to us that the -- the lack of -- of activity that we saw, just simply pretends to not installing the new bandwidth at the same rate. I'm talking business now. So,when you look at both the simultaneous enterprise and carrier, which is in both of the two markets, it just appears to us, that the enterprise business is sending us a signal as to why during that same timeframe the carrier spending is down. But that's sort of the way we interpreted it.

Is it a little puzzling to you, though, because it doesn't seem like from a macro economic standpoint things really slowed down in the second-half of the year. Overall, you look at the economic data, things kind of seem to be going at a nice, steady upward pace.

You're absolutely right, and that's the thing that has surprised us a great deal. And although I -- except in some very, very specific instances, I don't attribute it to inventory. I do think that what we-- that we saw in our business was in the '03 and the second half of '03. The first of '04. For the very first time, people are starting to go back to a higher rate of spending and we got a little catchup type of rally in there. And things then drop back and let this underlying long-term growth catch up with us. That-- I think both of us and everybody sort of speculating at this point, but I'm trying to give you my best ideas and best adjustment concern thing situation.

Great. That's fine. Thank you. Then, Jim, just a couple of housekeeping questions for you. Who are your 10 percent customers for the quarter and for the year, and could you give us also the percentage of revenues from CLEC in Q4?

Yes. The 10 percent customers continue to be SBC, Verizon,and sprint, and I do have the percent for the quarter, not yet for the year, but for the quarter. I've got 23 percent for SBC, 10 percent for Verizon, 14 percent for Sprint. And in regards to your question on CDLEC revenues, we're looking at estimated 14 to15 percent in total.

And what was that in Q3? Talking about for Q4, right, 14 and 15 percent?

For CLEC, yes.

And how does that compare to Q3?

It was very similar. Okay. So that would, I assume, thats where the IAD's so the IAD's basically were -- were they down sequentially, IAD revenue, or were they flat?

They were - they were flat to slightly down.

Okay. Thanks, guys.

Your next question comes from Andy Schopick of Nutmeg Securities.

Jim, first, would you repeat that CLEC contribution in the quarter?

14 to15 percent of revenue.

Also,I wanted to ask you about new product contributions for the year as you define new products. Did you give that percentage?

For '05?

For '04.

For '04, yes. For '04, 19 percent of total revenue was new products.

For the year.

For the year.

And for the quarter?

For the quarter, it's--its - we haven't given that. Now, let me give you for Q3 year to date was 19 percent.

Okay, fine.

All right.

Mark, I wonder if you could talk about DSLAM pricing trends. What did you see occur over the course of 2004? What is your expectation in the new calendar year for any kind of price erosion, in a general sense there?

Okay. To start with, as is sort of usually the case, Adtran is the price leader. And so any kind of overall pricing declines that really occur in the domestic market in '04. We probably were the instigator. And so when you look at our pricing, through the year, we really have not seen any pricing pressure at all. Due to the nature of the market in DSLAMs, it's pretty much ( inaudible ) and we don't really anticipate any pricing pressure in the domestic DSLAM area. And so we are basically anticipate that in general it's going to be at or above the corporate average profit level. If you talk internationally, now you have a complete and totally different situation.

Could you elaborate a little further on that?

Well, you have a multiplicity of suppliers on the international area, and so depending on what part of the world you're talking about, why there are places, such as the Far East, where the pricing pressure is enormous.

And your exposure there is limited?

Very, very limited, yes.

Any thoughts or comments about the merger between Tellabs and AFC and whether or not that could create a little more direct competitive situation for you?

I don't think so. But first off, we wish all the people well. Fine people in both companies, now that they have merged, that we wish them all well. We never really have, over any extended period of time, had a major competitive experience with either company. In the very early days of HDSL, Tellabs was a player. From time to time, we have competed with Advance Fiber in the past. But they were more a customer of us than a competitor, as we over the years sold them some HDSL on an OEM basis. So, we really haven't competed that much with them in the past. As far as a direct competitor on the exact same product, we don't see that much today.

Okay. Thank you very much.

Your next question comes from Nikos Theodosopoulos of UBS.

Yes, thank you. Had a couple of questions. First, on the new products, it appears that in absolute dollars they were down sequentially and I just wanted to confirm that and is it fair to say that they were all three products were down or was there, you know, some ups and downs? Can you give some clarification on that?

Jim, do you have that?

Nikos, yeah, I think the numbers would reflect that new products are slightly down. Within DSLAM, we actually had larger volumes and outside plant remote terminal. Okay. In terms of Optical Access, flattish, and in terms of NetVanta for the quarter, we were flat to slightly down there.

Okay so. It sounds like NetVanta and COD slams were the ones that were slightly down.

Mm-hmm.

Okay. And on the outlook for the fourth quarter, what's your sense on the gross margin of the company in the guidance that you gave? This quarter the margin was down sequentially, probably due to the mix and the lower revenues. You kind of see the margin being -- groww margin being flatist to (inaudible)? Any major change?

Nikos, I think I'd like to leave that up to the analysts. What we provide are the top line and bottom line, so to speak. And I think most people are familiar with how we operate, in terms of the operating model.

Okay so. Let me ask the question differently. Why was your gross margin down sequentially this quarter?

It was down sequentially this quarter because of a -- a larger than anticipated decline in enterprise revenues in relation to total revenues. Okay. So we had a shift in mix divisionally, so to speak.

Okay. Okay. Fair enough. And on the OpEx, is there a way to clarify how much of the OpEx this quarter was tied to the OSMINE and accelerated ADSL approval process? In other words, I'm trying to figure out, is there a portion of your OpEx that will go away in the first or second quarter or are these recurring expenses that really won't go away?

That's let's look at this this way, Nikos. This is Mark. Those expenses were a little over 7 million for the year, to give you an order of magnitude, and, yes, we expect them to decline, but we sure don't expect them to go away.

Okay, and the last question, '05 tax rate, what's your guidance on that?

We haven't settle order that rate yet, Nikos.

Okay. Okay. Thanks a lot.

Mm-hmm.

Your next question comes from Simon Leopold of Morgan Keegan.

Thank you. Couple of, hopefully, quick questions. One, in terms of looking forward on the product strategy in new products, if you could give some thoughts on when you'll have products with V DSL 2, V as in Victor, I know your strategy is typically being a fast follower, but it seems to us that the environment may be moving towards that. And also, maybe looking out towards '06, when and if, you think you would enter the market for fiber to the premises products? I know in the past, you've talked about considering it, but you've stayed on the sidelines. And finally, since the NetVanta products seem to have come up short of your target of reaching 5 percent of sales, by the end of the year, wondering if you could give us a sense of your thoughts on when you do get to that 5 percent of revenue level? Thank you.

All right. You got three good questions there. All right. V DSL. Yes, VDSL is going to be a technology of interest to us, and there is going to be a place for it. A very definite place. It can be important. Yes, we are normally a fast follower, but once we get into a product area, such as DSLAMs, then we try to change our attitude from being a fast follower to, okay, now we're following, now we're going to be a leader. And as we look at VDSL, to be very specific, the specs and the standards have been in revision. There are some new standards involved. There's some new silicon that is in the process of being developed by companies, other than ourselves, at this point. We think that one must have products that meet standards to be able to have a meaningful volume of revenue generation possibility. We are working at this point, therefore, very hard to be not a follower, but a leader in having VDSL products that meets the new standards as absolutely as soon as we possibly can. Your second question was in relationship to fibers to the premise. And there, the big question in our mind, is not the technical feasibility, but the economics involved. At this point in time, we have chosen, as you know, to invest the majority of our time and effort, and development activities on products that would be classified more as fiber, to the neighborhood, to the curb, or whatever, but with the last bit being via copper, and in that area, either by ADSL 2+ or by VDSL when the new, you know, the new standards are able to be met. In the NetVanta, once again, so long as we keep doubling, I'm going to be happy. And we definitely think that we should be able to hit that 5 percent goal during '05. I hope I've answered your questions.

Thank you very much, Mark.

Your next question comes from Gina Sockolow of Buckingham Research.

Thank you. Thank you. Can you hear me?

Yes.

Yes.

Okay. Could you just go over-- I know you're not going give specific gross margin guidance, but traditionally, first calendar quarter, large contracts are negotiated and you sell into those large contracts that have some price reduction clauses to them. Do you expect the same to-- this to happen again this quarter? And, second, when you look at your -- you RBOC customers, do you expect to be second sources in those contracts or prime, and separately, are those contracts for new builds or replacements? Thank you.

All right. Yes, you're right. There normally is at the start of the year in a number of the contracts price decreases. However, on an overall basis this year, we do not expect that that's going have a significant impact to gross margin. I'm not in a position to try to tell you exactly what impact it would be, but I do not think it would be significant at all. Your second question, I didn't catch the product, or at least I didn't write it down. So would you repeat that again?

I'm sorry. I was not product specific. I was just talking about the kind, new contracts with the RBOC.

No, no, ma'am, I meant the second question, that you had other than just the --, the contracts with the RBOC's is not product specific, I understand. But I thought had you a second question.

I had asked if those contracts are as -- with Adtran as a second source and separately, are --

Yes, a second choice product is what I didn't understand. Which contracts are the second choice? Because most of our contracts are, we are prime source.

You're prime, and for the new RBOC customer or two, do you expect to be a second or a prime?

In relationship to what, which contract?

Well, when you were asked the question do you expect to get new RBOC customers, you said, you expect to have four, and you would be disappointed if it was only three.

Oh, no, that was in regards to a specific product, and if I remember right, it was outside flat DSLAMs.

Okay.

And if I remember right, and that's what it is, we would be a prime source.

Okay, and that's for new builds or replacements?

New builds.

Okay. Thank you.

All right, Gina.

Your next question comes from Tim Dubinsec of Pacific Crest Securities.

The first question is in regard to NetVanta I guess you mentioned that it's sequentially down in the fourth quarter. Is that a bit of a surprise, considering some of the new products you've had -- that came out? And then the second question I have, is any plans to accelerate the buybacks or consider another special dividend? Thank you.

The first question, the weakness in the fourth quarter was a surprise, and the weakness in NetVanta being pretty much flat was also a -- even more after surprise. Yes. Yes, that was a surprise.

Is there anything specific you can attribute it to? I mean you had you a couple of new products. I kind of expected it to be up.

I attributed it to the unfortunate pragmatic situation that -- that when we introduce our new products, we don't have the kind of thing that in the first month or two, or the first quarter that we sell, $150 million of the crazy things. I wish we did. We usually start off slow, and build. It isn't as exciting, maybe as the other, but it tends to have a longer life. But it -- it -- yeah, we were surprised that ---the it area was down, because the trend is so very, very strongly up in that area, that -- it was quite a surprise to see it flat. Now, did you have a different part that have question?

Yeah, just a question, you said had you about a million left in terms of buyback. Kind of the planning in terms of when you expect that to expire and any plans for another special dividend down the road?

What we do at every board meeting is go over in detail, is there anything at that particular point in time that we need to do. We looked at the -- from a dividend standpoint, we look, of course, at our payout ratio and from a buyback versus the special dividend, which we did at one time, we try to look at what is the most efficient method of -- of giving value to our stockholders. I think, at this point in time, although we really should say, is what Jim did in his comments that in our last authorization, which does not have an expiration date, I don't believe, we have a million shares left, and that should we complete that, then we would make a decision as to what our next step would be.

Thank you very much.

The main goal there is, that we wish to do what is in the best interest at all times for our shareholders.

Your next question comes from ( inaudible ) of J.P. Moran Morgan.

Hi, can you hear me?

Yes, we can.

First in, comments, Mark and Jim, when you say you saw pause in the second half of '04, are you expecting that to bounce back in the second half of 2005. Do you have any indications so far, you know, that we're weak through the year, I know there's a lot of bill and shipping in your business, so there is very little visibility, do you have any indication so far that could point you to the fact that 2005 will be different from what you saw in the end of '04? And then if I could drill down a little bit more into the Optical Access and OSMINE, not so much whether the expenses for that will start falling away, I'm sure they will, but the timing on that when there come a product that you can actually start ramping big way with the RBOCs? And, then finally, on the NetVanta, I'm just trying to understand a little bit as to -- it seems that that market seems to be a vibrant and alive, an awful huge market, multiple billions of dollars to get into, and I would have expected, given that the rest of the business had come down, and you gave a couple of explanations that make sense as to why the rest of the business may have come down in the second half of '04. None of those explanations would seem to apply to NetVant, there was no sort of buildup of extra -- from a specific amount on routers, no buildup of sales at the end of '03 or early '04, that would have caused some sort after pause. So, I'm just wondering why it wasn't higher, and was it purely just promotion related, or lack there of, (inaudible) in putting behind it? I would expected it to have been larger a lot faster. And when can we see that sort of really ramp?

All right. Well, let's start probably in reverse on your questions, if I might. Let's start with the NetVanta question. Once again, two points. One, the NetVanta was up strong in the third quarter. And so it -- its weakness or lack of, continuing the same growth rate only occurred in the fourth quarter. And for all the reasons that you gave, yes, we were surprised. With that, you have, you know, some larger inputs, contracts that make things lumpy. I don't personally like that word. But, yeah, we were surprised that it was not as strong in the fourth quarter as it had been in all quarters, including the third, going forward. The -- the history of our entry into new markets just simply tells us that it takes us a while to ramp new products, even when they are coming into rather large markets. As one develops infrastructure and credibility. And so we really see no difference than what one would pragmatically anticipate with the NetVanta effort. Once again, as long as it continues to grow at very high rates. There is obviously, as you point out, there's large enough market to support it until we very good. The question regards to the Telcordia testing and out of that and been asking about when the products might be able to hit the market. I think that we previously discussed that outside plant DSLAM is one of the main products that we're involved, and that we would anticipate that at the very, very end of the first quarter, or more than likely, significant revenue generation of being in the second quarter for those. As far as,do we have any great -- your first question--

What about the optical assets?

The Optical Access, we think, will be later in the second quarter.

And no change in timing to that?

No, sir. Your first quarter, we've got about three weeks, I guess it, is, into the year and I'm not any smarter than I was three weeks ago, unfortunately. It's not enough time for me to really have any -- any new thoughts.

Okay. If I could just ask one for clarification, did you say there was no price in question for DSLAM's in 2005?

In relationship to Adtran pricing, yes. Not in relationship to somebody else's.

What about in 2004?

Wait a minute. I just answered that question in relation to '04. Excuse me.

That was '04 versus '03?

Yes.

And you (inaudible) to maintain constant?

I would think so, yes.

No need to lower prices?

I don't see it, no. Thank you.

Your next question comes from Marcus Kupferschmidt of Lehman Brothers.

Hi, good morning. A couple of things I want to explore, in terms of the March 2005, quarter sales guide, can you give us a sense of what are the pressure points and the trends you're looking at, in terms of what could get to the high end of your guidance, versus the lower end of the guidance for sales ?

That question requires such a detailed response, that I don't think I'm competent to answer it. As far as trying to break down which of the many different product areas that we have, would have the best capability of surprising us to the upside. Because what we have every quarter is basically two things. We have successes and from time to time at points with individual product and/or market areas and then we have overall across the board type of things that tend to seem to effect all of the product areas, which we believe is the case in '04. I Interpret your question to be which specific areas do we think match the process on the upside in first quarter or in '05, and I just don't have an answer. It's too early for me to be surprised yet, I think, So, I'm not trying to evade your question. I just don't, just don't have an answer for you.

Okay is the basic assumption that we should see new products be stable or grow in the March quarter?

I think, as we said, we anticipate that the new products will continue to grow. And we anticipate, both absolute and percentage wise.

Okay. So, that was a general comment for '05, and you're saying we can consider that even true for the first quarter of '05?

Pretty much so, yes. Now, if you look at what we are giving guidance for in the first quarter, then you're going see a -- all of the revenue, according to the guidance range, at pretty close to flat levels from the fourth quarter. So, please, don't take my comments to mean that I expect the new products would have a very high growth rate, and all of the rest of the products will be in decline. That's-- we're getting down to such a fine level of detail, I don't think that we, we really have the capability of giving you accurate or meaningful information.

Okay, fair enough. Just to-- let me ask in terms of the revenues from Sprint, it looks like they were down noticeable in dollars in the fourth quarter, from the third quarter, and my understanding is that business is shared part --about a third of that goes into -- I'm sorry, about a third goes into Sprint network, two-thirds goes into the north supply. Do you see weakness in one area of that Sprint account versus another, and what's your feeling on the stability of that account?

Jim, do you have any information on that?

Mark, I -- I haven't -- I haven't drilled down to that level, and it's also hard for us to see that anyway as far as distribution versus their network.

Do you feel there could be any exposure given the potential mergers that they are exploring with Nextel?

Marcus, I don't know.

I don't -- I don't think that Jim and have I in a detail. I think that Thomas and Daniel would have that detail, not us.

Okay, and then just two quick housekeeping questionses. What's share count due in the March quarter here?

I -- I will assume flat from the fourth quarter, Marcus.

Okay, and just to be clear, in your 2005 comments, you talked about DSLAMs leading the OPTI. In terms of just dollars of growth, do you think you get more dollars of growth also out of the DSLAMs than the OPTI products?

That's hard to say, Marcus, at this point.

Okay.

One of the questions there, Marcus, is that the OPTI, as we commented earlier, with the schedule involved, is going to be a quarter later in the year than the OSP DSLAM's. Your talking about year revenue, thats also a factor in there. We feel very good about the optic.

Super.

Wes, if there's one more question, we're running over a little bit, but if there's one more question, we'll take it.

Yes, sir. Your last question comes from Joe of (inaudible) -- Financial.

Yes, good morning, guys. Two questions. Jim, could you reiterate your comments that you had on your prepared remarks about the approximately $5 million sequential decline that we saw in the HDSL segment, and what the saw of that was?

Right. The primary driver there, Joe, was actually in the DSU/CSU side of that revenue category.

Okay, as opposed to the HDSL side?

Gentlemen, his very first paragraph, let me pull it here, he--

I'm talking about in regards to the fourth quarter specifically.

Okay.

Yeah.

So was that your question?

Yeah, when you say primary, Jim, can you elaborate any further with respect to what percentage primary might indicate?

I mean that's about as much granularity as I can provide at this point, Joe. We don't actually break out CSU/DSU versus line cards and HDSL systems there.

Okay.

But it's a larger part of this sequential decline in HDSL relates to DSU/CSU.

Okay. Got it. Thanks. And then, Mark, just one quick question. With respect to DLS sales -- sales--- as it relates to , I guess, to primarily central office applications, most of the service providers have made it pretty clear at this point in time, that there will be a segment of their subscriber base who will not see FTTN or FTTP networks either in near term or even possibly in the long-term. And for those type of subscriber who is presumably will still be the focus of the plain vanilla DSL service, for lack of a better term, what role or what impact is the transition to ADSL 2 and 2+ playing for those type of subscribers?

Quite frankly, very, very little. Beyond the advantage for those type of subscribers, under the current terrace, under the current setup, I think will continue, is going to be the fact that the chip sets that enable ADSL 2+ have a lower power, and so the products involved because of the lower power , can be denser, and that's what we, in fact have done. And with out outside plant equipment allowing us to go to 48 versus 24 lines. Which, of course has nothing really whatever to do with the 2+ feature of the spec. But, we don't see any direct impact on those customers. We would like to point out, however, two things that basically all of our outside plant at that point, we have HDSL 2+ technology available really in all of our products. Some of it is being installed and some of it is simply in the testing phase, awaiting approval for us to switch from the standard to the HDSL 2+. The big advantage that we see for ourselves and for our customers with the 2+ standards going forward is that the line side is now capable of being upgraded to much higher speeds through binding, and just the higher speeds per line. The A DSL 2+ allows giving them application capability to things other than as you put the current vanilla DSL. And so that to me, is the biggest long-term benefit of our having HDSL 2+ in all of our ADSL products, is the fact that all of a sudden then these products can be expanded to new applications to take advantage of it, even though the first customers it would be used won't take advantage of it at all.

Okay. Great. Thank you.

Does that answer? Okay. Wes, at this point, I think we've run over about ten minutes, which is fine. But I think that we probably ought to shut off the question and answer period, and everybody go back to work. I would like to thank everybody that called in this morning. We appreciate very much your interest in the company. For those of you who are still on the call at this point, we especially appreciate you spending an hour with us, or hour and ten minutes, whatever, this morning, and we hope that we will have a chance to go over the future and the prospects of our company this time next quarter. So thank you very much for calling in. We appreciate it very much.

Thank you for participating in today's conference.