ADTRAN Holdings Inc (ADTN) 2005 Q1 法說會逐字稿

Good morning. My name is Cynthia, and I will be your conference facilitator today. At this time I would like to welcome everyone to the ADTRAN first 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 Form 10-K for the year ended December 21st, 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 are 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.

Okay, thank you, Cynthia. I would like to also welcome everyone to ADTRAN's first quarter conference call this morning and thank you for taking your time to join us. As you have seen from our press release, ADTRAN was able to overcome the seasonal weakness of the first quarter and posted a flat revenue versus the prior fourth quarter results.

We sure saw in the first part of the quarter, the normally very weak bookings during January and early February. But by the latter part of February and throughout March, the order rates were exceptionally strong. Both our gross and net profit improved significantly from the fourth quarter. Our continued efforts at cost control, along with a favorable product mix, allowed these improvements.

Our System products, which includes new products, which normally carry higher profit margins, increased as a percentage of overall revenue during the quarter. Our international sales also improved to 8% of revenue during the quarter.

On an overall basis, for a first period of the year, we at ADTRAN are very, very pleased to be able to point to these numbers and the results of the Company during this normally very weak timeframe of the year.

At this point in time I'd like to turn it over to Jim Matthews, our Chief Financial Officer, to let him go into some of the detailed aspects of the quarter. Jim?

Thank you, Mark, and good morning, everyone. Revenue for the first quarter was $104.6 million, flat from Q4 of '04 and down from $114 million in Q1 of '04. Carrier Networks Division revenues were $76.4 million in Q1, up from $76.1 million in Q4 of '04 and down from $78.2 million in Q1 of '04.

Comparing Q1 of '05 to the same period last year, the decrease in Carrier Network Division revenues was due to a decrease in DVT Total Reach and HDSL revenues, partially offset by an increase in Systems revenues.

Enterprise Networks Division revenues were $28.1 million in Q1, slightly down from $28.5 million in Q4 of '04 and down from $35.9 million in Q1 of '04. Comparing Q1 of '05 to the same period last year, the decrease in Enterprise Network Division revenues was attributable to a decline in sales of Enterprise DVT 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 ceased business in the second quarter of '04. We anticipate continuing share gains with integrated access devices.

For the total Company, the HDSL T1 product category revenue was $45.1 million for Q1 of '05, down from $53 million in Q1 of '04. This decrease is primarily related to a decline in CSU/DSU revenues and seasonal factors in regards to HDSL. Digital business transport Total Reach was $3.2 million in Q1 of '05, down from $6 million in Q1 of '04.

Systems revenue was $56.2 million in Q1 of '05, up from $55 million in Q1 of '04. The growth in systems revenue was primarily due to an increase in optical access in NetVanta product revenues partially offset by a decline in integrated access device revenues.

Revenue from the international sector for Q1 of '05 was approximately 8% of total revenue.

Gross margin was 57.6% of revenue during the first quarter of '05, compared to 57.1% for Q1 of '04. The increase in gross margin percentage is primarily the result of continuing improvements in manufacturing efficiencies, product cost reductions and favorable product mix.

Research and development expenses were $16.3 million in Q1 '05, compared to $14.8 million in Q1 of '04. The increase was primarily due to our quarterly expenses relating to Optical Access and DSLAM products.

Selling, general and administrative expenses were $22.9 million for Q1 of '05, compared to $21.8 million for Q1 of '04. This increase is primarily due to professional services related to Sarbanes-Oxley implementation and increased insurance costs.

Other income, net of interest expense was $2.3 million in Q1 of '05, compared to $1.8 million in Q1 of '04.

Our income tax provision rate for the first quarter was 34.4%. This is an increase from the prior year '04 tax provision rate of 31.7%. During 2004, we realized additional research and development credits from prior years and settled other prior year contingencies. The net effect of these items lowered our 2004 rate.

Earnings per share, assuming dilution for Q1 '05, were $0.20, compared to $0.25 for Q1 of '04.

From a balance sheet perspective, inventories decreased $900,000 from the prior quarter, to approximately $40 million. Net trade accounts receivable increased $1.2 million to $64.9 million. DSOs came in at 56 days for the first quarter, the same as the fourth quarter of '04.

Net cash provided by operating activities came in at approximately $24 million for the three months ended March 31, '05. Cash and marketable securities net of debt totaled $292 million at quarter end, after repurchasing 1.15 million shares of common stock during the quarter, for $20.7 million, and paying $6.1 million in dividends during the quarter.

A balance of 4.85 million shares for repurchase remains on the 5 million share repurchase program announced last February.

Now we would like to discuss guidance for the second quarter and for the year '05. We are a book and ship business, therefore, we typically carry very little backlog from quarter to quarter. We are guiding revenue for the second quarter of '05 to a range of $108 million to $112 million, and earnings per share to a range of $0.20 to $0.22. For the year '05, we continue to guide revenue to a range of $455 million to $485 million.

Of our primary growth product areas, we anticipate these same revenues will continue to lead Optical Access and NetVanta revenues in 2005, with outside plant and remote terminal DSLAMs driving the larger part of the growth in the DSLAM category.

We continue to guide earnings per share for the year to a range of $0.90 to $0.96.

Mark, back to you.

Thank you, Jim. At this point, Cindy, we'd like to see if we can start the question and answer session, and I'd be happy to take the first question.

(OPERATOR INSTRUCTIONS.) John Anthony, SG Cowen.

Good morning, guys. A couple of questions. One, would you be willing to give the breakout of new systems versus core systems?

Yes, John. This is Jim. John, for the first quarter, new systems, so to speak, which would comprise DSLAMs, Optical Access and NetVanta products, comprised 21% of total revenue.

Okay. On the HDSL side, how much of the sequential decline was, in your opinion, related to seasonality, versus some of the reuse programs going on within your customer base?

John, we think the reuse type of programs have pretty well moderated. And looking at in my opinion, that we're looking at primarily a seasonal situation.

Were there any notable AFP reductions, or I guess contract price reductions that occurred within that line in the March quarter?

Yes, in the first quarter we have a number of contracts that are on a calendar year that are on a preset price reduction. On the overall basis, however, John, these were not major type of things. That's a secondary thing to the normal seasonality that we see in the first quarter.

Okay. And lastly, could you just go over--I know you're limited in terms of what you can say about your customer base on the DSLAM side, but can you at least tell us how many RBOC customers you're recognizing revenue from on the Mini-DSLAMs?

Yes, multiple, let's put it that way. More than one.

Okay. I guess another way to ask the question, were there shipments of any of the Mini-DSLAMS or any of your other DSLAM products where you did not recognize revenue in the March quarter?

I don't understand. You're saying shipments that we didn't recognize? That would be shipments of prototypes of field units, that kind of thing?

Well, field units, but also units for deployment at a later time where you would not have recognized the revenue [for] any new RBOC customers.

No, we do not have consignment shipments of any significance at all.

Rich Church, Unterberg.

Thanks. Good morning. Maybe I'll ask it a different way. Did you see revenue from any new RBOCs in the quarter for the DSLAM product?

Not to any significance, Rich. As we had basically said before, that the new RBOC customers that we anticipate, and have been anticipating outside plant DSLAMs, that we basically thought that that would be late in the second quarter.

And is there anything with regards to Telcordia or anything like that that is going on that could affect the timing of that?

No. That whole thing is pretty much on schedule. The Telcordia part of it is winding down. We have enough other items now that are going on in Telcordia that don't anticipate that the expenses in that regard will fall to nothing, because they won't. But at least they will be coming down. And the schedule, we're pretty much on schedule with the Telcordia activities in relationship to the DSLAMs.

Okay, great. And then with regards to NetVanta, you had talked about reaching 5% of revenue at some point this year. Could you give us any indication how that did in Q1?

It was like so much of our business in Q1. It was very, very weak in January-February. March was by far the best month we ever had, very strong in March. To where the overall quarter, March made up for the weakness in January-February, and if I remember right, which I think I do, brought NetVanta shipments and revenue in the first quarter to a record.

That's correct.

We're not at 5 and I can assure you I'll let you know when we are.

Okay. And just one last thing. With regards to the bounce-back in March, could you give us any characterization? Was it just an improvement in CapEx and is it sustainable going forward?

Predicting the future is not my strongpoint. So, the sustainability of your question, we'll have to wait and see. It has sustained through today, put it that way. It was not in any one item. It appears to me to be across the board, number two. Number three, I'm just not convinced that there's that much capital equipment budget orientation in a lot of our business. In DSLAMs it is to some degree, but most of it is based on the order rates of customers.

So, it just appears to me that the business activity, the order rates coming into our carrier customers, required strong purchases of our hardware by them later in the quarter, as the order rates came back.

Zeke Aria (ph), Merrill Lynch.

Good morning. I'm curious to know, Mark, in spite of this upside in Q1 where you exceeded the expectations you had laid out late last year, why do you have such a conservative view for all of '05? The guidance that Jim presented is similar to the guidance given before. So I'm just curious to know, typically the second half tends to be stronger than the first half, is this just conservatism on your part or are there other factors in play here? Thanks.

Well, it's pretty hard to go out and change a yearly estimate based on six, seven, eight weeks worth of bookings. The other thing too, of course, is that when you look at the year, the guidance, we are projecting, obviously in that guidance, a strong second half. And so, the strong second half is already included in the guidance that we have out there.

I would like to believe and like to think that when we get to the end of the year, that you'll be correct, that we have been conservative. At this point in time I sure wouldn't want to change the guidance that we have, in that based on the knowledge that we have going forward, it is still our best estimate as to the probable range and the probable outcome of the Company for the year.

I see. And a quick follow-up, Mark, is the three major RBOCs; Verizon, SBC and Bell South, have indicated their support for the IPTV standard as part of the next leg of the broadband access upgrade. I'm curious to know what ADTRAN's position is with respect to your product support for IPTV? Do you see your DSL products being used for video applications, or do you see the primary application just being the high speed internet for the Mini and outside plant DSLAMs? Thank you.

We definitely have every intention of participating in IPTV. And we definitely, as you point out, believe that the most opportune point for our major participation will be in the outside plant area. Because that is a major area of expertise for this Company that we think would provide real value into that application.

We believe that both some of the products that we have now, in the outside plants area especially, they have ADSL2+ capability, where multiple pairs can bring high speed connections into the home, have application. And we also believe that we will have additional products that will be aimed directly at this marketplace, because we believe that this is going to be a significant market in the future, and one that we definitely plan to participate in.

George Notter, Jefferies & Company.

Hi, guys. Thanks very much. I guess I was just curious about the inventory situation. Clearly, if we go back and look at Q4, you guys were impacted by excess inventories in some of your customers and certainly Verizon's reuse program. But, do you think when we look at Q1, do you think we've worked through most of those inventory situations and Q1 is a pure reflection of underlying demand from customers, or are you still struggling with a little extra inventory out there and maybe that gets worked off as we roll into Q2?

George, it's hard to give a specific answer that covers the entire order front. But to give you a flavor of my opinion on the subject, I think that the major impact of the inventory situation has been worked down. That I guess for some customers that of course they're going to have more or less inventory. But I think that both the inventory and the reuse program that had an affect on us in the past, that both of those are pretty much on the downside as far as importance at this point.

Got it. So, then looking at Q1 again, is it fair to say that maybe some of that excess inventory created some drag on your business in Q1, or do you think there was none of that at all?

George, I think there's, I'm sure, some. But I think it was minor compared to the seasonality nature of things. The seasonality really just gets us. January-February, is just like there was nobody out there. They all came home and came back to work, it appeared, in the end of the second week and the start of the third week in February.

Got it. And then just as one last follow-up. As I look at the guidance you gave for Q2, it looks like 3% to 7% sequential growth. I go and I look at many years of data going backwards for your business in Q2, and it looks like the average growth was about 10% sequential. Plus it certainly appears like maybe you get some snapback from if you have any work-off of this inventory situation that was a drag in Q1. It seems like the Q2 guidance, in light of those things, is probably pretty conservative. Is that a fair way to look at it?

Hey, trying to predict the future is not, as I said before, not my strongpoint. I would sure think that 10%, the number that you put out there, would be awful, awful stretched. But, I guarantee you this, we're going to do the best we can in the second quarter, whatever that may be. And right now the market out there looks good. I think our guidance is--call it conservative if you would like. I like to call it realistic. We certainly hope and believe at this point in time that we can achieve that.

Ehud Gelblum, JP Morgan.

Hi, guys, good morning. Thank you very much. A couple of things [that I had], first of all a couple of housekeeping things. The tax rate that's now higher, it sounded as though that came from an unnaturally depressed tax rate in 2004. I just wanted to make sure that the level we're at right now, around 34%, is the right number to use going forward?

I think it is, although there is potential that it might change. But I think it's fair to use it for estimation.

Okay, great. In line with that on the EPS line, the guidance you gave, which you'd given previously in January, of $0.90 to $0.96, remaining unchanged now, since then, you've had the stock buyback program that you put in place I believe sometime in February. You've bought back some of that. Can you talk a little bit about the criteria you're using to buy back shares?

If you complete this, you'll have reduced your share count by somewhere in the vicinity of 6 or 8 or so percent. Shouldn't that, just in and of itself, the fact that you are buying back shares, since the original guidance was given, shouldn't that provide a boost, just a financial engineering boost, just to the earnings side, just from the fact that you're now doing the share buyback that you hadn't had in place when you originally gave the guidance?

We had anticipated that we were going to be buying back share during the year and I think that one of the things that you need to look at with calculating the impact, is that it's the average shares over the timeframe, not the number of shares at the end of the period. So, more than likely, that impact would be half of what you see.

Okay. That's a good point. It also depends, I guess, on the timing of the buybacks.

And the timing, by the way, is of course something that we don't know.

Okay. On the HDSL side, clearly that fell off, 45 million was the lowest I think it's been in about a year and a half or so. What do you attribute--you said that you attribute that to seasonal impacts as well as a couple of other things that you said. Do you think it stays down there? Looking at the future is a tough thing, but if you're seeing what you see right now, do you think that that's sort of the run rate-ish that we'll be seeing or is there a reason to feel more bullish about that part of the business as well--?

No, I think it'll come back from the current first quarter numbers. And it's just dependent on the use of bandwidth by the business community. A small or medium sized business especially--or medium size, really I guess. That the more bandwidth they use and they require, then there's more T1 and there's lines required. And so, I see it coming back from the seasonal low of the first quarter.

How did HDSL trend throughout the quarter as well? Did that also pick up in the latter half of February and be strong in March or was that--?

You lost me there. I thought I was answering HDSL.

Yes. And did that pick up in March as well?

Oh yes. Now I understand what you said. Yes, it did, certainly, yes.

Okay, so you're looking at the sales [formulas] and everything right now, it looks as though the growth shouldn't continue as you've seen it right now?

There's no reason. Well no, we don't have much visibility.

Right. Last thing, when you look around at the other companies that really have nothing to do with you aside from the fact that they sell somewhat into similar bases, we've seen some negative pre-announcements from enterprise companies, mainly over the last two weeks. But I guess the end user for your HDSL T1, even though it goes through carriers, is somewhat enterprise related.

And then of course you do have an enterprise-related business as well in your [net band] and I understand that you're gaining share there, so you don't necessarily fall under the category of what's happened to the market. But, when you looked at what the other enterprise companies did and what they were saying is happening with the end markets, does that give you pause at all or do you think you're HDSL business is kind of going to a different beat than the overall enterprise?

No, I don't. It gives me pause and it gives me a reason to believe that, along with the seasonality, the lack of a robust growth in the enterprise market itself, is a contributing factor in the weakness we saw in HDSL in the first quarter, quite frankly.

Okay. Then you saw strength at the end of March and other places saw weakness?

Do what, sir?

You saw strength at HDSL at the end of March and other companies saw weakness in the end of March.

I know, but for the entire quarter as a whole, we saw the strong seasonality and overall weakness in the HDSL.

Okay. And I guess finally, do you expect any R&D expenses to come off now that [OS line] seems to be--you said that there's more OS line activity going on, but would it come back any more as you kind of near the--?

We think it'll come down, certainly, from the third and fourth quarter and come down a little bit from the first, I believe. I just don't, off the top of my head, know exactly how much was in the first. But we think that will come down, maybe 30% from what it was of the [unintelligible], 30 or 40%.

Okay and we'll start seeing that a little bit at next quarter as well?

I think there's some more to come down, yes.

Tim Daubenspeck, Pacific Crest.

Thank you very much. First question, can you give us a little more color on DSLAM, small central office versus outside plant in the quarter? How was small central office year over year, quarter over quarter, et cetera?

Tim, you're getting down to the detail of it. Off the top of my head, I don't have it in front of me. Jim, do you have that in front of you?

What I do know is that for the first quarter, central office DSLAM shipments continue to exceed outside plant and remote terminal.

Okay. And then the next question, on NetVanta, the strength you saw in March, was that more kind of just overall end market demand or was there a specific program, or a change in your distribution strategy that might have impacted that response in March?

No, Tim, it was an overall strength.

Okay [inaudible] question. Can you just refresh what the timing is for your buyback window, when you can go back into the market again?

Jim?

I'd say about Friday.

What it is, I think, Jim, correct me if I'm wrong. Three days after this conference call.

That's correct.

Up through the last day of the second month of the quarter.

That's correct.

Reg King, WR Hambrecht.

Great, thank you. First of all, I was hoping that you could give us an update on the Optical Access RFT activity. Mark, did you shift any new customers during the quarter, and can you just give us an overall update on your progress with the Optical Access product?

Okay. Yes, we shifted a number of new customers. Reg, I can't. You need to talk to Tom Stanton on that one, because I don't have the information on the top of my head.

Okay. And Mark, maybe you can answer this one though. With some of the RFT activity out there, there are some customers who have RFTs out where there's some carrier consolidation. Can you give us your feel for--have you seen any slowdown in business decisions being made with some of that activity, based on the consolidation among those carriers?

Reg, are you talking about AT&T?

Specifically, yes.

Okay. No, we haven't. And the reason that we haven't, is that we saw that slowdown in the lot of the access activity that we were involved in sometime back, a year or so ago. And as we talked about that situation, I guess in our last conference call, that we have a good bit of IAD business going into AT&T, which as we get closer to a merger date, we would not be surprised to see some delay and confusion in relationship to that business.

However, we think that on an overall basis, the merger will bring new assets and additional money into that particular customer of ours. That, we believe will increase, net-net, our shipments into what is now the AT&T.

So, on an overall basis, there may be a slight disruption, however, I think it'll be minor as we approach a critical date. But on the long-term, since SBC is our largest customer, and we also have a number of projects that could be done at AT&T, we just tend to believe it's going to be very positive for us after that merger has occurred.

Okay. And then, Jim, on the strength in international, were there any specific regions, have you started to see some of the new international programs that you put in place last year start to pay off?

Well, I think Telstra continues to be strong and we're very optimistic about that particular customer, going through this year. And we still have a focus and opportunities in Latin America as well. And we're looking at other regions of the world as well to expand into.

What it sounds like, Jim, is your international business is just expanding overall, but the [seam] set is in proportion with your previous trends?

I think so, Reg, to date, yes.

Jason Ader, Thomas Weisel.

Good morning. I just wanted to ask you, on the overall annual guidance, can you help us get comfortable with the second-half ramp? You've always talked about how you have little visibility in your business. So, what are the factors or the inputs that make you comfortable that you can ramp as strongly as you implied, in the second half of the year? What specific products and/or projects?

Jason, what we are looking at is two things. Number one, that we think that the market itself is going to be reasonably strong in the second half, certainly compared to the first quarter. But in the new product area, we are very excited about, as you know, our outside plant DSLAMs that we think will generate a significant increase of business.

As Jim pointed out to a previous question, our CO DSLAMs are still at a much higher revenue rate than the outside plant, which simply means that we have that incremental revenue still on its way and still to make an impact on us. This quarter we also saw a strong increase in our Optical product line, which was the second, or another major area that we felt would ramp during the year. And of course, we're also very pleased with the way that NetVanta is coming on.

So, what we are banking on is an overall market that is equal to or a little bit stronger than what it is today, coupled with these new products that, due to market opportunities out there that we see that should be realized in the second-half.

You're talking about specific contracts, basically in hand, that haven't yet [inaudible] revenue, is that correct?

Well, we have a couple of situations that that is exactly what the situation is. And then, we have some others that are not in hand, but we believe that we have a great opportunity to get them in hand.

And none of the significant projects or contracts that you've been anticipating have fallen out, they're still there?

Not yet.

Right. Just on the HDSL business, your main competitor there has been talking about gaining share or the potential of gaining share on you this year. Would you care to respond to that? Is there anything that--?

Well, our competitor has been talking about gaining share for the last three or four years, as have we. And thank heavens, over the last three or four years we have been right. And going forward I would sure hope and anticipate that we would continue to be right.

And last question, Jim, could you tell us your 10% customers? I missed that if you already said it.

Yes, 10% customers for the first quarter were SBC at 19%; Verizon at 10%; Sprint at 12%; and Alltel at 11%.

Now you may note that Alltel is a new add to that list, which is helping us broaden and continue to broaden our customer base and we look at Alltel as a very, very fine company and a fine customer.

Is the outside plant DSLAM, kind of this [net] got them over the edge?

Jason, it was two things actually. It was indeed areas of DSLAMs and Optical Access.

Nikos Theodosopoulos, UBS.

Thanks. I had a couple of questions. I apologize, but I missed the percentage of revenues to new systems. Can you give that again, Jim?

21%.

And were all the new products up sequentially?

Yes, they were.

Okay. You know, historically I think the ranking of these products were DSLAMs, Optical and then NetVanta. Is that still the ranking or has Optical outpaced the sizing or DSLAM business at this point?

It remains DSLAM, Optical Access and NetVanta.

Okay. Just two other quick questions. You mentioned how the quarter sounded soft in orders and really picked up at the end. When I look at your DSOs, however, they really didn't change sequentially. So I'm trying to understand why your DSOs didn't go up, if a lot of the bookings and payments were received towards the last month of the quarter?

Because, the only thing I can say is the collections were very strong.

Okay.

Nikos, I've noticed over the years, in this industry, that maybe your customers feel sorry for you, but as the end of the fiscal year winds down and they start looking at their payables, and by the end of the first quarter, why, they really come down nicely.

Okay, so basically a lot of payments for stuff that was bought the fourth quarter happened to smooth this out?

Right. We got paid off, yes.

Okay. Last question. Jim, on gross margin, the mix shift, it sounds like will continue to go to new products, just on the commentary on this call, and this quarter the gross margin was better than I think the guidance and expectations. What's your feeling for the trend going forward in the second quarter? I mean, the guiding revenue's up sequentially. It seems like most of that will be new products. Would we see another sequential increase in the gross margin?

Well, Nikos, it's tough to say. It's all dependent on mix, whether or not the percentage mix will continue in the second quarter as we saw in the first quarter. And that's really what's going to drive it primarily, is the--.

Nikos, I think that what we're saying is that the gross margin improvement in the first quarter was a surprise and that we see positive trends, but we'd be surprised to get two surprises in a row.

Simon Leopold, Morgan, Keegan.

Thank you. I wanted to revisit the topic of the reuse programs. I take it you were a bit surprised last year by the program and hence the pre-announcements. I want to see if you can talk about the potential for another one of your major customers to undergo a reuse program of HDSL capacity, how you see that risk, how you assess it? First question.

The second thing I'd like you to talk about is on the international business, it's been kind of lumpy. It looks like it's down a tad this quarter and generally it's something that sort of hangs out there, maybe we look at as gravy. But if you could give us some color on where you think that goes and how you might be able to grow that beyond the business you've had in Australia? Thank you.

Simon, the reuse, these things go in cycles and I think we've about finished one. And we could have somebody go into a reuse program next week, but I'd sort of be surprised. I think that that's sort of behind us.

The international, although we did not--in Jim's discussion there, did not really pick up a major new portion of the world as far as a significant increase for international business, our geographic area, as far as an absolute area, we had a very nice increase to the 8% level. And so, we'd look at international as a specific opportunity. And we are absolutely, right now working in a number of countries to where we would like to be able to point to different parts of the world that we are as successful as we have been in Australia and then the Far East.

Also just to revisit Jim's comment earlier on the Systems business, the legacy systems products, those were up sequentially from the December quarter or were they down?

On an overall basis, I don't know. Jim, do you have them?

Yes, they were up as well, Simon.

Timm Bechter, Legg Mason.

Thanks. Ehud actually asked most of my questions on the T1 HDSL stuff, but I just wanted to get one more thing if we could on the clarification between the carrier side and the enterprise side and whether or not wireless had much of an impact on the HDSL T1 market? I know that's something that you have a little bit of difficulty seeing through. But could you tell at all whether or not on the carrier side there was less spending on T1 for wireless backhaul?

Timm, there was a significant amount of spending in the backhaul, I would say approximately a year ago, that isn't there in the same amount today. And so, where we are now, small changes, we just don't have the visibility really to tell from quarter to quarter the changes in the application of T1.

Now we did see a pick up in our Optical Access products being used for backhauling. However, Timm, that's a market share issue, not an overall carrier spending issue in the backhaul area for us.

And what was your first question in relationship to the HDSL, I've forgotten?

Actually, Mark, you pretty much answered it. It sounds like that overall, at least on a year over year comparison basis, you're seeing less spending on the T1 HDSL for wireless backhaul. Did I hear you correctly?

Yes, except that it is a secondary--at least in my opinion, it's a secondary effect, with the enterprise requirement for bandwidth and their ordering of T1 as being the prime determinant.

I guess I'm just kind of curious, if you compare year over year on these quarters, is the wireless backhaul may be the difference?

I think it's a part of a different [chisel].

But not necessarily all of it?

No.

Ari Bensinger, Standard & Poor's.

Yes, I was just wondering if you could give your view on--long-term, of course, how the move of telecom to fiber will impact your core markets and how you plan to be positioned? And then also, you mentioned that last call, the impact of stock option expense on '05?

Mark, I can take the second one real quick. The impact in '05 will actually be nil. Just last week the FASB pushed out the requirement for implementation, starting first quarter of '06. Okay?

Is it, in terms of if it would have been recorded?

On the last conference call, we did say that based on an implementation date starting the first of the third quarter, the impact would be $0.05 to $0.06 per share for six months.

Okay.

The fiber is, we think that it will, over a significant period of time, represent a shift within the Company from some products to other products. But as fiber gets pushed further and further out into the network, which is going to be an evolution, not a revolution, then we have products now and we certainly anticipate as this push of fiber out further into the network continues, that we'll be developing additional products in that area and that we anticipate that we will be in a--we are now and will continue to be in a position to take advantage of this change in the overall architecture of the network.

Andrew Schopick, Nutmeg Securities.

Good morning. I don't know, Mark, since when did customers start feeling sorry for their vendors?

Well, one of the things in this industry is that the payments are very, very good, in that when you ship hardware, you just don't sit around for six months hoping and praying that somebody's going to pay you. You get paid. And I know we look at it where with our suppliers that we want them to be very cost-sensitive when they are dealing with us and how can we ask for their participation if we don't pay them on time?

And so, I think that this industry in a lot of ways is maybe unique, but believe it or not, it's true that the payments are not the problems--timely thing as they are in some businesses.

Well, you took me a little more seriously than I meant it to be, but thank you just the same. I wonder if I could ask Jim a couple of questions?

Sure.

Jim, international, a couple of people have touched on it, but I'd like to ask a little further, whether the increase in the international business is primarily the result of increasing your VAR reseller distributor network, in terms of increasing the breadth of channels, or whether there is actual growth in various geographies that you're achieving?

Yes, the growth that we've seen more recently, say over the last several quarters, the larger part of it has been with Telstra and selling directly to Telstra, in Australia.

Okay. And is the revenue recognition on your overseas shipments pretty much the same as it is here in the States, basically, on shipment?

Yes, it is.

Okay. And the last thing I wanted to ask you, Jim, is whether you could give any kind of an update or comment at all about this filing of Hudson Alpha Institute registering 1.2 million shares of restricted stock for sale sometime here this Spring, what the disposition of that might be?

I'm not sure I understand your question for sure when you say what the disposition of that might be.

Or have those shares, in fact, been sold into the open market?

That I don't know, in that that is in, of course, in the hands of the Trustees that are associated with that Institute, that of course, have no relationship to ADTRAN. And Jim, I don't believe that there's a reporting in relationship to that, is there?

No, there's not, Mark. Andrew, we don't have visibility into that activity.

Okay. That answers that question. Thank you.

Joe Chiasson, Susquehanna Financial.

Good morning, guys. Any additional color that you can provide with respect to the new products and what the relative increases were, quarter over quarter? I mean, the press release mentioned that all three of them were up sequentially, but were any one of the three up particularly strongly or less so?

Joe, yes, all three were up sequentially. The larger dollar contributor of the sequential increase overall in that new category, relates to Optical Access.

Okay. And one more question, Jim. With respect to the decline, either sequentially or year over year in the HDSL segment business, can you give any color with respect to what percentage of the decline might be attributable to the CSU/DSU business, as opposed to HDSL?

The larger part of the sequential decline was coming from HDSL. Wouldn't you agree with that, Mark?

You said the larger decline in the T1 was in HDSL. I thought it was in DSU/CSUs.

Well, the larger dollar decline would have been sequentially in the HDSL area. Although yes, we did see sequential decline in DSU/CSU as well.

Okay, I'm with you then.

Absolutely.

Tim Slevin, Parker Hunter.

Good morning. Just a couple of questions. First off, in terms of NetVanta, I was wondering if you could provide a little bit of additional color in terms of year to year growth from the first quarter of 2004 and where you're seeing that? Is it in new switches, in routers, or is it across the board?

I don't have the numbers, but it's pretty much across the board. In terms of our new switch router products, we've seen very good activity there. And certainly in relation to first quarter of last year and sequentially as well.

And NetVanta was up nicely. You don't have the precise numbers, but it was up nicely year on year?

Something around double, wasn't it?

Yes. Yes, it was up very nicely, Tim.

Great. Just a second question. There had been some probing in terms of gross margin and I wonder if you had--you listed the various factors there, but was most of the gross margin sequential increase due to mix?

Tim, I would say it is.

Okay. And I guess a question in terms of the second quarter. If you get a bounce-back in HDSL T1, is that going to depress the overall gross margin potentially?

Well, that remains to be seen. New products do have a higher gross margin than the HDSL.

Okay, great. And then just a third question. The tax rate expected for the full year, it's still early, but if you get any changes, is it likely in changes in terms of increased realization of tax credits from R&D spending? Because it does seem like 34.5 or 34.4 is up--is a pretty high number compared to your experience of previous years, acknowledging that your profit levels are higher.

Well, again, last year, as I commented before, there was downward pressure, so to speak, on the rate, due to us realizing credits from prior years last year. And we haven't really--we don't see that sort of impact in '05. Although things could arise that would take it down slightly or even take it up slightly as we progress through the year.

The overall bias, given the potential for credits would be down slightly or is that too early for you to really comment on?

Well, it's too early to comment on. We do have a number of years that are open that potentially we could realize additional credits on, but it's very, very hard to predict what that might be.

Operator, I think that our time is about up now and we can take one more question.

Eric Buck, Janco Partners.

Yes, thank you. Just a couple of things. First, can you talk a little bit about the R&D line? It was down fairly significantly on a sequential basis and [unintelligible]. Is that related to the winding down of Telcordia and what will we expect to see going forward on the R&D side?

Mark, would you like for me to take that one?

Yes, please.

Eric, we did see decreased activity with Telcordia in the first quarter, as more of our products have gotten through the process in terms of DSLAMs and Optical Access. We will continue to see some level of expenditure in Telcordia as we go through the year, as we introduce new products. But I think overall, the trend specifically relating to Telcordia, as it relates to first quarter, might be flat to slightly down as we progress through the year. But again, all that's dependent on the timing of any new product introductions that we have going through the year that require that process.

Right. And then [unintelligible] quarterly related R&D you would expect to scale up through the year, so that the net number increases from Q1 level?

Well, as we said early in the conference call, we're anticipating sequential increases in revenue and as that happens, we believe that the percent of R&D expenditure to revenue would decrease as we go through the year. Most of that line is fixed. There are some variable components, but most of it is fixed.

Okay. And then on the Systems side of the business you mentioned--if I did a calculation on the new product contribution, it looks like new products were up sequentially about 2 million, yet the overall systems business was up about $7 million, so it looks like legacy was actually the much bigger contributor in the sequential gain there. Can you talk about what was driving that?

Yes. I think the sequential increase in new product revenue might have been a little bit higher than 2 million that you suggested. But we have a variety of other products that we have in the Systems category; M13 Multiplexers; 303 concentrators and several other products that showed positive trends.

Okay. And was that related to a specific program or specific customer or across the board?

Pretty much across the board.

All right, Cathy, I think at this point in time, the time has run out for us. And I certainly would like to say I appreciate the time everyone has spent allowing us to explain any questions that you have about ADTRAN. Obviously, it's our favorite subject to talk about. We look forward to our conference call in three months. And we'll be happy to respond to everyone at that point in time. So once again, thank you for spending your time with us this morning.

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