ADTRAN Holdings Inc (ADTN) 2005 Q2 法說會逐字稿

Good morning. My name is Michelle and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Adtran second 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 marketing acceptance of new products, the degree of competition in the market for such products, the product and channel mix, component cost, manufacturing efficiencies, and other risks detailed in our annual report on Form 10K 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 are Mr. Mark Smith, Chairman and Chief Executive Officer; Mr. Tom Stanton, Senior Vice President Carrier Networks Division; Mr. Danny Windham, Senior Vice President Enterprise Networks Division; Mr. Howard Thrailkill, President and Chief Operating Officer; and Mr. Jim Matthews, Senior Vice President and Chief Financial Officer. Mr. Smith, you may begin your conference.

Thank you, Michelle. I’d like to welcome everybody to Adtran’s second quarter conference call; I appreciate you taking the time to spend with us this morning.

I’m extremely pleased this morning to be able to discuss three very important things about the company’s current position. First is to be able to discuss with you Adtran’s excellent second quarter performance that we were able to announce yesterday evening. Also, I would like to discuss our positive outlook for the balance of the fiscal year. We’ll get Jim Matthews to go over our guidance on some of those areas here in a few minutes. Also I’d like to be able to discuss and answer any questions you might have concerning the management changes that we announced, which I strongly believe is going to provide for strong leadership for the future of our company.

As we noted in our press release, our revenue for the second quarter was up 13.7%. Our income was up 36.1% from the first quarter. Jim Matthews, our Chief Financial Officer, will shortly be able to provide to you specific third quarter guidance, but suffice it to say, we also anticipated continued double-digit quarter-to-quarter growth in the third quarter.

Our revenue growth in the second quarter was primarily the result of our systems revenue growth, and our international sales moving from 8% of the total of revenue all the way to 13% of the revenue for the first quarter, a tremendous job by our international group, obviously, during the quarter. Our HDSL T1 shipments were up strongly from the normally depressed first quarter also.

The second quarter was significant in another important respect. I have repeatedly, over the last couple of years, noted that even though the new product area is growing strongly on a percentage basis, its growth will not have a significant effect on our overall total corporate performance until it reaches around the 5% of total revenue level. From then on, however, a high growth rate in an area adds, in a meaningful way, to overall company performance.

During the second quarter, both our NetVanta product line of routers and switches, as well as our optical Sonnet based multiplexer line, exceeded this 5% threshold. Now all of the three new product areas, including the DSLAMs of course, that we introduced two and a half years ago, have each grown to over 5% of total revenue each.

Finally, this conference call is most significant for me, as I announced yesterday my retirement in yesterday’s press release. As I reach 65 in September, having spent 19 ½ years as the company’s CEO, I feel it’s time for the next generation of leadership to take over the day to day management of the company. As I stated in the release, I will remain as Chairman of the Board. Howard, who has been with us almost forever now too, will retire. Howard will retire at 67.

Our new team of Tom Stanton, CEO; Danny Windham, COO; have been general managers of our carrier division and our enterprise division, and I’m sure that most everybody on this call is familiar with both of these gentlemen. Having been with the company for 10 and 16 years respectively, they are obviously well known by all.

We have on the call today, in addition to Howard, Jim, and myself, we have both Tom Stanton and Danny Windham. During the question and answer segment I encourage specific questions be directed to our new management team. At this time I’d like to ask Jim Matthews, our CFO, to give a financial review of our second quarter, along with third quarter and full year guidance. Jim.

Thank you Mark, and good morning to all. Revenue for the second quarter was $118.9m, up from $104.6m from Q1 of ’05 and down from $120.6m in Q2 of ’04. Carrier network division revenues were $89.3m for Q2, up from $76.4m in Q1 of ’05 and up from $86.6m in Q2 of ’04. The sequential increase in carrier network’s division revenues was due to an increase in HDSL, and systems revenues, partially offset by a decline in DBT total reach revenues.

Comparing Q2 ’05 to the same period last year, the increase in carrier network division revenues was due to an increase in systems revenue, partially offset by a decrease in DBT total reach revenue.

Enterprise networks division revenues were $29.6m in Q2, up from $28.1m in Q1 of ’05, and down from $34m in Q2 of ’04. The sequential increase in enterprise networks division revenues was due, in large part, to a sequential increase in NetVanta revenues. For the second quarter of ’05 NetVanta revenues exceeded 5% of total revenues. Again, we consider this a significant milestone as we continue our focus and commitment to gain market share in this product area.

Comparing Q2 ’05 to the same period last year, the decrease in enterprise networks division revenues was attributable to a decline in sales of enterprise DBT products 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 around the end of the second quarter of ’04. We anticipate continuing share gains with integrated access devices.

For the total company, systems revenue was a record $62.8m in Q2 of ’05, up from $56.2m in Q1 of ’05, and up from $59.6m in Q2 of ’04. The growth in systems revenue was primarily due to an increase in DSLAM, optical access, and NetVanta product revenues, partially offset by a decline in integrated access device revenues.

HDSL T1 product category revenue was $53.6m in Q2 of ’05, up from $45.1m in Q1 of ’05, and down from $54.7m in Q2 of ’04. Digital business transport total reach was $2.4m in Q2 of ’05, down from $3.2m in Q1 of ’05, and down from $6.4m in Q2 of ’04.

Revenue from the international sector for Q2 of ’05 was approximately 13% of total revenue. As a percent of total revenue, this is up from 8% in Q1 of ’05, and 7% for the total year ’04.

Gross margin was 58.5% of revenue during the second quarter of ’05, compared to 57.5% for Q2 of ’04. The increase in gross margin percentage particularly is primarily the result of continuing improvements in manufacturing efficiencies, product cost reductions, and favorable product mix.

Research and development expenses were $16.4m in Q2 of ’05, compared to $15.9m in Q2 of ’04. The increase was primarily due to Telcordia expenses relating to new products.

Selling, general, and administrative expenses were $24.3m in Q2 of ’05, compared to $23.5m in Q2 of ’04. This increase is primarily due to increased selling costs and increased insurance costs.

Other income, net of interest expense, was $2.4m in Q2 of ’05, compared to $1.8m in Q2 of ’04. Earnings per share, assuming dilution for Q2 of ’05, were 27 cents, compared to 26 cents for Q2 of ’04.

From a balance sheet perspective, inventories increased $6m from the prior quarter, to approximately $47m. This increase in inventory levels is in anticipation of an increase in revenue for the third quarter of ’05.

Net trade accounts receivable decreased $800,000 to $64.1m, due to improved collections. DSO’s came in at 49 days for the second quarter, down from 56 days for the first quarter of ’05.

Net cash provided by operating activities came in at approximately $22m for the three months ended June 30 of ’05. Cash and marketable securities, net of debt, totaled $308m at quarter end, after paying $6.1m in dividends during the quarter.

Now we would like to discuss guidance for the third quarter and for the year ’05. We are guiding revenue for the third quarter of ’05 to a range of $128m - $130m, and earnings per share to a range of 29 cents to 31 cents. For the year 2005 we are guiding revenue to a range of $480m - $485m. Of our primary growth product areas, we continue to anticipate DSLAM revenues will lead optical access and NetVanta revenues in 2005 with outside plant and remote terminal DSLAMs driving the larger part of growth in the DSLAM category.

We are guiding earnings per share for the year to a range of $1.04 - $1.08. Mark, back to you.

Thank you, Jim. Michelle, at this point in time I think we are ready to start in with the question and answer session, so if you could start that process, we’d appreciate it.

Yes, sir. [OPERATOR INSTRUCTIONS] Vivek Arya, with Merrill Lynch.

Good morning. My first question is visibility in the HDSL and IAD business. Has it improved relative to historical trends, or do you still see the level of volatility we have seen in the last two or three quarters?

The nature of the business really hasn’t changed in that as we have said many times, we are a book and ship company. Therefore, from a visibility standpoint, we do not have backlogs that stretch for extended periods of time. We, at this point in time, have seen our backlog increase, and in the past we have basically said that we carry about a two week backlog. That has increased to three weeks.

The volatility of HDSL and the IAD sales, I would not look at those two as having any unique volatility, unique to them. As I think that Jim explained in his comments, HDSL improved dramatically from the first quarter. However, that is pretty normal in that the first quarter is especially significantly the weakest one for us, especially in the HDSL area, which we attribute to the weather in that new HDSL installations in the January/February timeframe are pretty much down for weather related issues.

In the IAD area, we had a very significant customer in the second quarter of last year end of it, as Jim had described, that went out of business. And, that was the major effect we saw in IADs. However, from an overall basis, if one looks at the different product areas that we have, you will find that, yes, there’s volatility in these areas, and, yes, they go up and down significantly.

But, as we look at it however, it’s just part of the nature of the entire communications industry. The advantage that we believe very strongly that Adtran has, however, is that we are very broadly diversified. We’re not depending on any one single product area. And so, therefore, as the volatility in any one given area does go up and down, we’re able to smooth that out with a diversification that we have to a significant degree.

Thanks Mark. I have, actually, a quick follow up question for Tom Stanton, if I may.

Certainly.

In the DSLAM business, I assume that the bulk of the business is still the traditional central-office-based DSLAMs. And even though the remote outside plant is in a growth mode on an absolute basis, it’s a smaller portion. So, my question is, in the traditional DSLAM business, do you see any impact when the new RBOC projects, fiber to the home, fiber to the node, when they start, do you expect that traditional business to stay flat, decline, or what would the impact be?

Let me start with the first part of your question, which is kind of characterizing the central office DSLAM, vs. the outside plant or remote terminal. I think we have been saying for some time the outside plant or remote terminal is going to be where the largest portion of our growth would be coming from this year. I think that this quarter was indicative of that and you’re seeing them, basically, equally contribute to the revenue line on our DSLAM product area. I think that the outside plant or remote terminal will continue to grow at a faster pace than the central office.

As far as the impact on the fiber to the prim or fiber to the node initiatives, we still believe those are some period of time out in the future, before they would actually have an impact on central office, or any other type of DSLAM cells. There is some delay that you’re aware of.

I think, in general, I would characterize the DSLAM area as having probably more focus at this point in time by the larger carriers with focusing on their rate structure, and focusing on net subscriber ads than they’ve had over the last few quarters. So, I don’t see anything significantly changing in that in the near-term.

And then Tom, sorry, one last quick follow-up, how much of the DSLAM growth is leveraged to new subscriber ads, vs. any technology upgrade? You know, say, going to ADSL2+, VDSL? Thanks.

We haven’t seen the ADSL2+, as a technology drive a significant number of new sales. Most of the sales that we have are either filling in slots in our existing shelves [ph] with ADSL2+, of course, which is compatible with the old ADSL. Or, new market penetration in footprint growth with our outside plant or remote terminal.

Thank you.

OK.

Your next question comes from Paul Silverstein, with Credit Suisse.

Thank you, two quick questions, just if you already gave it, Jim, my apologies. New products, as a percentage of totals, I think you’ve given that historically?

Sure, Paul. On a year-to-date basis through the second quarter, the new products was 24% of total revenue. And that’s versus 21% for the first quarter.

Then secondly, can you give us more insight, in terms of the very nice, very strong growth that you had in international? What products, what regions, you know, what changed, vs. your historic business outside of the US?

Howard, why don’t you handle that?

Our growth overseas has been driven most recently by strength in our shelf-based products, both all the way from TDM to DLSAM products. Most of them central-office based and coupled with our terminating devices that go with that, and we’ve been very pleased with the pace as it’s accelerating here. But that’s been the primary growth.

We have our shelf-based products in a few dozen countries now and that creates slots into which we can plug new Adtran products and then terminate them with our NTU devices. So, we’re pretty bullish on our prospect for international business.

AS I look quareter-over-quarter, was there meaningful expansion of the customer base? Was it deeper penetration of the existing customers, both?

All of the above. We, of course, have been on quite a growth spurt for the last year, year-and-a-half. We’re still seeing that expand and we expect to continue to see a continuing expansion throughout the rest of the year. Perhaps not at quite the frantic pace that we’ve had recently, but nevertheless, very strong.

One last question, if I may. If I understand you, it’s not one particular product, but it’s across your platforms?

That’s correct.

OK, and who are you taking business from?

Well, for the most part a lot of these are new applications, but a lot of the traditional suppliers from Europe and Asian suppliers have been where we’ve gained the most traction.

Margins on the international business, are they meaningfully different from corporate average?

I believe they’re on the same kind of path as our domestic sales activities, perhaps. They’re certainly at least as strong. And, we have one other thing that helps, is that we have, here at Adtran, a very sophisticated supply chain, including some production activities overseas. And, with the sophisticated supply chain that we’ve got, we can ship directly from some of those foreign sites and achieve some further savings. So,we’re pleased with the margins we’ve got overseas.

Thank you.

Your next question comes from George Notter with Jefferies.

Hi, thanks very much. I just want to congratulate Mark and Howard on their tremendous careers at Adtran. You guys obviously have built an impressive company over the year, so hats off to you. And I wish you the best in the future.

The question I have has to do with the outside plant DSLAM Product line. You guys commented last quarter that you thought you’d ship products into Verizon and SPC, starting in the second half of Q2. I guess I was wondering if that indeed happened. And, was it a material contributor to the quarter? Or, does more of that business really kind of hold over into Q3? Thanks.

Thank you for the comments, George. Tom, can you handle that?

Sure. George, we were actually looking at, now this is trying to forecast RBOC behavior, but we were looking at starting to ship outside plant DSLAMs to those two RBOCs in the first half. And, we were able to ship one of those RBOCs in the first half, although it wasn’t significant revenue. So, we will see that continue to ramp up. And we are still fully under the understanding that the second RBOC will be shipping here very shortly. And so you should see those ramp up through this year at least.

Thanks.

Your next question comes from Rick Church, with Unterberg.

Thanks and I’d also like to add my congratulations and best wishes for Mark and Howard. I have just a question on the guidance. Obviously it was very strong for Q3, but the full year numbers imply that Q4 would be flat, maybe even down from Q3. Are there specific projects ending? Or, could you give us some color on that?

Rich, I’ll try to take that one. This is Mark. We felt as if we had pretty good visibility into Q3, quite frankly better than normal. Q4 is one of those slim quarters that, until you get close enough and you start seeing whether your customers will basically have a bunch of money that they want to spend before the end of the year, or, in the alternative, whether they absolutely will try to quit spending anything, other than that which is mandatory. Until you find out which end of that spectrum, or where along that spectrum you’re going to be, you really don’t have a good feel on the fourth quarter.

So basically what we have done in the fourth quarter is to look at it and say we’re going to be conservative, and just simply assume at this point that it’s going to be the same as the third.

Do you have any color as to particular product areas that might be more vulnerable to that type of spending constraint?

Yes, any of the product areas that are not absolutely driven by customer orders. HDSL, for example, is ordered by the RBOC, when he runs out. And he runs out because he’s received orders from network users and end users that want to have new HDSL lines installed in their offices.

Some of the DSL products, especially some in the outside plant, is, however, ordered to insure that the network can be fully built out and to be able to cover some of those places that otherwise might not be currently covered with service. Those are the types of products that would be more vulnerable than the ones that would be totally driven by enterprise network demand.

OK, thank you, and if I could ask Jim for the 10% customers?

Right. For the second quarter, Rich, the 10% customers were SBC at 20%; Verizon at 11% and Sprint at 14%.

OK, thank you.

Your next question comes from John Anthony, with SG Cowen.

Good morning, guys. I apologize if you’ve already addressed this, but on the gross margin, historically you guys have talked about a 55% target operating model. Where does that stand now that the gross margins are so much higher than that level?

We just think it’s great, and an opportunity going forward for us to be very, very competitive. So, where it stands right now, we are in about the same situation we have been for a year to 18 months, really. And, we find that, due to our product mix changing and moving towards the systems area and more recently introduced products that this product mix has helped continually move our gross margins higher.

As it has done so, we continue to look and see, are we losing business anywhere because of price competition? And so far, the answer is no. Not that I can see. And so what we basically feel is that we have an opportunity to be much more price aggressive out there if we have to be. But at this point in time, we don’t see that we’re losing any business because of our margins.

Do you feel comfortable, at this point, to raise the effective target range on your gross margins then?

I’m going to leave that to the next management team. And the reason I say that-that’s chicken, isn’t it? The reason I say is that for the last 20-some years, I’ve seen the gross margins bounce around the 50% to 55% area. And it’s only in the last two years that I’ve seen the margins climb from 55% in an upward mode.

I have commented a number of times in the past that I think that this is true. There’s a severe pullback that the industry had in late 2000, 2001 and 2002, and the resulting elimination of a lot of the competition that we were facing in the late 1990s, they just simply pulled out of the business over the last three or four years. We do see, quite frankly, some of the pricing competition.

My experience, however, is don’t look for pricing competition to not be severe. So my position has always been that we will enjoy higher margins while we can, but we will continue very aggressively working on reducing our costs to where should we need to bring average selling prices down, as a company, we’ll be able to do so, and not effect our bottom line.

During this timeframe it has allowed us to spend more money in engineering and in the operational side of the business than we would have been able to otherwise. However, we need to be very, very diligent to insure that if and when gross margins do decline, that we have a business model that says “so what?” That we have our operational expenses in line to meet our bottom line model of 24% - 25% free. I think we’re right in a sweet spot, and being able to do that.

OK, thanks.

Marcus Kupferschmidt with Lehman Brothers.

I just have a quick housekeeping question. Was there any share repurchases during Q2 at all?

Marcus, there were no repurchases in Q2.

Great. Then could you give us a sense toward the enterprise, the next band of growth that you’re starting to see – maybe Danny could give us a sense of what are some of the areas you’re finding the best penetration now, is it US based versus international channels? Then maybe could you talk a little bit more about the overall outlook for the enterprise business, why it seems like the IAD business remains soft, if there are opportunities to win new channels, which I thought you guys were working on, which I would have thought would have started to help to improve the sales outlook for that and some of your other enterprise products? Thanks.

Marcus, this is Danny, I’ll take that one. The NetVanta growth in Q2 was really up across a number of different market segments. What we saw in Q2 really was not dominated by any particular large deal, or any customer. It’s been more across the board run rate business, if you will. The business is predominantly coming from the US. So we have seen some growth in our international efforts for the NetVanta product line, but those probably are still in their infancy stages and really have not matured yet.

In the outlook for the enterprise business, enterprise is really going through what you might classify as a changing of our product mix. The traditional wide area networking products that have made up the enterprise division have been in long term decline. For the past couple of years the growth in IADs has offset the decline in those traditional wide are networking products, and today what we see is NetVanta is coming on strong enough to offset, and hopefully overcome, the decline in those traditional wide area networking products.

So going forward, the traditional contribution from our legacy products is becoming less important, the growth in NetVanta is becoming more important, and what we see is NetVanta is rally growing across a number of different market segments. Some of the more successful areas for NetVanta have included retail space, government space, and any organization that is dominated by either lots of remote sites, or just small business in general.

Super, thanks Danny.

Jason Ader, Tom Weisel Partners.

Good morning everyone. A few questions specifically on the backlog and inventory build that you talked about. I don’t know who would answer this best, maybe Jim. Where are those products or what are those areas concentrated on, in terms of products?

In terms of the backlog, Jason, where we’re seeing a significant part of that is in the outside plant remote terminal DSLAMs, and optical access products, some level of HDSL.

OK, great. So that would also be the inventory build obviously, right?

Yes.

OK, and then the NetVanta, maybe Danny can take this, on the quarter-to-quarter growth of NetVanta, it obviously had to be over 5% of sales this quarter. Can you give us a sense of what the sequential change was in NetVanta, on a percentage basis?

What we’ve seen is very impressive sequential growth from NetVanta for both Q4 versus Q1, and for Q1 versus Q2. Jim, I don’t think you have announced that.

No, I haven’t.

That number is sizable double-digit growth.

OK, are we talking like 50%, or could you give us some flavor?

Well Jason, in the first quarter we were under 5%.

How much under?

In the second quarter we’re actually approaching 6%. So the second quarter was a strong quarter.

OK, so when you say Q1 was under 5%, was it significantly under 5%?

I don’t know those fine details Jason, but that’s a general indication of where we fell.

OK, great. Then last question, just on the DSLAM market and some of the pricing trends for that space. Are you seeing any increased price pressure in the market, and if so, is that benefiting you? Because you’re the price leader.

Mark, I’ll take that one. The DSL market has been relatively aggressive and it kind of comes in spurts as RSPs open up, and then it settles down and then as new RSPs open up you see aggressive movement at that time. So I would say, in general, the overall flavor of the DSL market really hasn’t changed since we’ve entered the market. As far as do we benefit? We benefit any time, I think, that there’s an opportunity to grow market share. So I’d say any time that you see this type of movement in the market, where there’s a good chance that we’re going to end up with some piece of it, so I would say yes.

Thanks everyone.

Simon Leopold with Morgan Keegan.

Thank you. I just wanted to go back and touch on the HDSL business, and see if you can discuss some of the trends there, specifically in the past you had talked about a reuse program at a particular RBOC customer. If you could just enlighten us in terms of how much of the rebound this quarter was essentially a recovery in spending from that customer versus normal seasonality? Then in terms of looking out to the future, I think you’ve alluded to wireless as a market opportunity, and another topic that I’ve been trying to get my hands around is carrier grade Ethernet as an opportunity for HDSL. If you could help us understand how you see those are market drivers. And just to close out on this HDSL question, if you could talk about the trends of what you’re expecting the growth there for the remainder of this year.

Simon, this is Mark. Let me take the HDSL and let Tom take the rest of it. The reuse program, that effect was pretty well over and done with during ’04. What we saw so far in ’05 was the normal weak seasonality associated with the first quarter. Then the robust recovery in the second quarter, it was really a little bit stronger than what we normally see as far as a first or second quarter type of situation. In general, there are no, at this point in time, specific anomalies that I’m aware of in the HDSL area that would have either a short-term positive or short-term negative affect on that business. Hence, we’re looking at that going forward, as we’ve pretty much been saying, is a flat to low single digit type of growth. Tom I’ll let you take care of some of the wireless and the back haul type of question he had there. I think we lost Tom.

Here we go. Simon, I think the question was on Ethernet delivery?

Well basically two topics in terms of potential drivers for HDSL products, one is the wireless market, perhaps in back haul or interoffice, and the other was maybe longer term of using HDSL as a vehicle for carrier grade Ethernet.

Sure. On wireless I think it’s something that we’ve experienced in HDSL over the last few years as the carriers have continued to upgrade capacity and then started to move toward data delivery. It’s just a very difficult thing for us to characterize because of the nature of who we ship to, which are mainly the RBOCs, and the fact that they really don’t point that in to who their end user customer is. So I think that to the extent that as subscriber net adds grow and cellular, to the extent more cell sites are added, or to the extent the data capabilities are added, there’s still a very large possibility that those would be HDSL fed, and that we would see that benefit. But we’ve had a difficult time trying to characterize exactly what that percentage may be.

On Ethernet, we are a believer that there will be new applications opening up over copper, and mainly Ethernet delivery is one of the ones that people have been talking about here in the near term. There are several different technologies that can tackle that. HDSL is a very good technology for that, and it’s proven and tried. There are other things that we’ve been very active in, Ethernet in the first mile, Ethernet over copper technologies that we have been working on in conjunction with that. I think it’s still a little early to talk about potential impacts and when those would actually come online, because I think the carriers are still fairly early in their thought processes there.

OK just to follow up on the wireless comment; certainly in understand you’re selling it to the wire line carriers that may be transporting wireless traffic, but do you seen any shifts in trends of your sales directly to wireless carriers, per se?

The answer is yes, and it’s really not HDSL specific. The majority of our sales into the wireless carriers are with some of our other products, OPTI-6100 for instance, being used by the wireless carriers. Then we announced a series of wireless products at SuperCom about two and a half, to three months ago, that were targeted directly at those. Those are still fairly early on in their growth stage, but we’re pretty happy with where they are right now.

OK, thank you, and I wanted to extend congratulations to Mark, Tom, Danny and Howard.

Thank you.

Andrew Schopick with Nutmeg Securities.

Thank you, I’ve got a couple, and also Mark, you take great pride in the accomplishments in this company during your tenure. I wish you the best.

Thank you.

Jim, I’m going to ask you first if you would repeat some numbers for me that I did not hear. Systems, would you just run those three numbers by me again?

Sure Andrew. For the second quarter ’05, systems revenue were $62.8m, HDSL T1 $53.6m, and DVT total reach $2.4m.

I’m sorry, just the systems I was looking for, across the three quarters. $62.8m for 2Q ’05 and 1Q ’05 and 2Q ’04.

1Q ’05 was $56.2m, and Q2 ’04 was $59.6m.

OK. I’d like to come back to international, Jim. Traditionally this company’s international presence has been mainly in Australia. I wonder if you could comment on what other geographies now are showing progress, if they’re meaningful, and to what extent you can comment on the size of the current VAR distributor network that is in place to sell specifically in international markets.

OK. Howard, do you want to take that one?

I’ll try. We have a very valued customer set in Australia, the primary carrier and some secondary carriers there, and that continues to be business that’s good for Adtran. We’ve also grown in Latin America, Thailand, and to some extent, China. We’ve recently gotten a foothold in Eastern Europe, so those are the major areas where we’ve had some maturing success and early success.

Would you say that all of the growth in international was principally outside of Australia, in these other geographies?

No, they’ve all grown, and we’re pleased with that. As Marc has said repeatedly on these conference calls, to sell to incumbent carriers is a long, drawn out process of qualification and testing, and evaluation of alternatives. So we’ve been in this and looked at it as a long term pull, and have worked diligently to gain our customers’ respect. That’s the reason, for my part at least, I’m reasonably confident that this expansion is going to continue. As far as how we sell, which I think was the second part of your question –

Yes, the size of the distributor and VAR network in place.

Adtran – 4+

We have Adtran offices in several locations now, I don’t have the list here in front of me, and the most sizeable one is in Australia, as you are aware. But in many countries we have to sell through indigenous distribution channels, China for example, we are required to. So it varies country by country. We’d like to have support staff in place so that we can continue a long Adtran tradition of out serving our competition, and that usually bodes well for us any time we do that. We built this channel very carefully, pay as you go, make money as we go, rather than just doing something impulsive. So to summarize, I guess just the traditional Adtran way of doing business.

Is there any potential issue of just kind of initially here some channel increased shipments into the channel for stocking purposes? Is there any concern that you may have about that issue?

I don’t have that concern. Over the past couple of quarters we’ve had trouble keeping up with orders I think would be a better description of that. That put a lot of pressure on our supply chain operation because in some important cases orders have outstripped what those customers told us they thought they were going to order, and that just put some strain, our supply chain guys have done a good job responding to that, but we’ve been running behind more than worrying about the kind of issue you raised.

OK, fine. Thank you very much.

Nikos Theodosopoulos with UBS.

Thanks, I have a couple of quick questions. Jim, in the past the ranking of the new products have been DSLAMs, OPTI and AdVanta, I’m assuming that ranking didn’t change this quarter, is that correct?

That is correct, Nikos.

OK. Is it fair to say that the sequential growth, though, is kind of reversed, where NetVanta kind of led the charge in terms of sequential growth? I’m trying to get a sense, if you look at sequential growth, how would you rank these products?

On a dollar basis, in terms of sequential growth, DSLAMs certainly had the lead there. Between NetVanta and OPTI, they were fairly close.

OK. In the early part of the conference call you mentioned about NetVanta getting 5%, but you also mentioned that OPTI was 5%. I had thought that that product was already 5% of new product sales.

In prior quarters it was very, very close to it.

OK, so this is also the first quarter for OPTI breaking 5%?

I believe so, yes.

OK and I want a little clarification on the split between outside plant and central office DSLAMs. Did I hear correct, that this quarter it was about 50/50?

I don’t think we said that, I think actually central office DSLAMs were still in excess of 50% for the second quarter as well.

OK, I must have misheard.

Nikos, this is Tom. I had mentioned that they were actually growing, and they’re getting closer to that range, but not necessarily right at the 50% level.

OK. Just one last question. Did you add any new tier one customers in the quarter for the OPTI family?

This is Jim, I’ll take that, tier one customers for the OPTI family, no.

OK, thanks a lot.

Bill Choi with Kaufman Brothers.

Thank you. A quick clarification on the central office DSLAM, part of the reason you had some weakness in the second half of last year was a slowdown in chassis shipments. Can you give some color on chassis versus line card for central office DSLAMs?

For central office DSLAMs, I don’t have that break out of chassis versus line card shipments. I would, just other than the general color, I would say that we’re still shipping probably as many chassis and new systems as we are line cards, but I don’t have specific numbers on that.

OK, the other question that I had, looking at your guidance for the second half, you mentioned some conservatism due to not having the visibility for Q4. I’m looking at a couple of things that are happening in the market, the biggest of which is the consolidation in the carrier space. You’ve got some exposure to Sprint, MCI, AT&T, can you update us on whether you’ve seen any changes in their spending plans or current purchasing behavior, as well as whether these are factored into your conservative guidance?

I have in the past, yes we’re going to factor that in, and what we really feel in general, is that we may see a short-term affect with, for example, AT&T. We look at the longer term is that these consolidations will be to our benefit, not to our detriment, in that both of the companies in all cases, we’re suppliers to both of them, but almost universally we are a larger supplier to the buyer than the acquired. So when we look at say the fourth quarter, we’re looking at the potential situation with these acquisitions, but we really don’t feel in relationship to some of the other unknowns, that it’s going to be a very major type of thing, due to primarily the relative amount of business that we’re doing with the companies that are being acquired.

OK, thank you.

Tim Daubenspeck, Pacific Crest Securities.

Thank you very much. The question is around enterprise and then around NetVanta. Can you just talk about enterprise activity in the quarter, talk about kind of linearity, you talked last quarter about March being very strong and April continuing? Can you talk about linearity in general, enterprise, and then the second question is on NetVanta. You’ve talked in the past about some very large kind of retail opportunities. Are those still in the pipeline for potentially the second half of ’05, or into 2006? Thank you.

This is Danny. The linearity of the EN business throughout Q2 was relatively constant across all quarters. With regard to the large retail opportunities we’ve been pursuing for NetVanta, a couple of those opportunities have been sort of our marquee opportunities we’ve been pursuing, are still in the works, and we are still marking progress. We would have expected those deals to have closed. Some of those customers have elected to put us into trials, continue to insure that they’re comfortable putting the product into their network, and at this moment those trials are underway and still going well.

And that enterprise activity, it’s been pretty solid through the first couple of weeks here in July as well? In North America?

Jim, do you have any of that data?

No, I don’t.

The trends that we saw going out of Q2, I don’t think have substantially changed in Q3 at all.

Great, thank you very much.

Joanna Makris with Adams, Harkness & Hill.

Hi there. With OPTI-3 now reaching that 5% threshold, can you talk a little bit about what applications drove that growth this quarter, and what potential opportunities you could see with tier one carriers for OPTI-3 this calendar year?

First of all let me start off by saying the OPTI number we’re talking about is OPTI-3 and OPTI-6100, so it’s actually both products. The 6100 since we introduced that has really started taking on the lion’s share of that revenue. As far as applications and our ability to sell into some of the larger carriers, we absolutely still are focused on doing that. We have made some progress into doing that and we still believe that that potential exists and is likely, over some period of time. There are still some RSPs that we had spoke about earlier that are either awarded, or very close to being awarded, and we’re still comfortable where we sit with those RSPs. So I think there’s a whole lot of potential for us going forward, in the traditional wire line side as well as the newer opportunities that we have seen in the wireless side.

Ken Muth with Robert W. Baird.

Good morning. On top of the senior management change over, congratulations on that, but your engineering staff deserves a huge hand. The engineering was truly world class at this; able to take costs out every quarter is amazing. Going forward here, how do you see kind of the smaller carriers impacting the Adtran businesses? Your products are both more at the low end, and now kind of gravitating toward the high end, but how important are kind of the CLECs and IOCs driving your growth going forward?

Tom, go ahead on that one.

Well the IOCs have been something that we started to push, I guess it’s almost been two years now, and we’ve seen significant growth. It’s been a real bright spot in the overall business that we’re doing. I see that continuing to go forward. Our product mix, the products that we’re going after, building both now and in the future, have great applications in those areas. Those carriers tend to move a little faster than some of the larger carriers do, so they allow you to get traction and some experience early on. So I wouldn’t see our focus shifting significantly from what we’ve been doing over the last couple of years. On the CLEC side, maybe Danny can comment on that.

What we see in the CLEC customer base today is a move toward [inaudible].

Danny, we can’t hear you.

I’m sorry. In Q2 we saw CLECs begin to adopt at a growing rate in IP based network architecture, and as a result, Adtran introduced a voice over IP based IAD, which is our first entry into that category. The growth that we would expect in seeing more CLECs adopt IP based architectures probably encourages the use of IADs by that customer base, and I believe the voice over IP IAD that we have introduced is going to be a very competitive product in the marketplace, and we would expect to continue to grow our IAD position in that customer base with the introduction of that product.

And a quick follow up on the DSLAM, which has had a lot of talk about it, is growth coming more from the RBOC side, or more from the IOC and CLEC side?

I would say probably more on the RBOC side. Definitely going forward I would expect that, and that’s just because of the sheer numbers that an RBOC would deploy versus a particular IOC.

Thank you, congratulations.

Joe Chiasson with Susquehanna Financial.

Good morning. Two questions, I guess the first one is for Tom. Tom, to what degree do you believe the recent price cuts in DSL services by the RBOCs is, or will be, a driver in the DSL business going forward?

Well in the past, historically as they have cut rates, their subscriber rates have gone up, so I don’t see any reason not to believe that at some point in time we wouldn’t see the same correlation. I don’t know if it’s happened as of yet, but I would expect that over time, that seems to be a price elastic market, and we would see some time of drive there.

OK, great. Then the second question was, with respect to the SDH version of the optical product, I guess maybe this question is for Howard. Howard, is the recent gains that we’re seeing in the international at all attributable to the SDH version of the OPTI product, or is that something that’s basically yet to come at this stage?

I believe that’s yet to come. Most of our success overseas has been in more traditional areas, although we do have the product just coming to market, and I’m very hopeful that it’s going to be successful in SDH version as it has been in Sonnet version.

OK, great. Thank you very much.

Michelle, I think that our hour is about up, so would you ask for maybe the next question and we’ll have to make that the last one for today.

Yes sir. Ari Bensinger with Standard & Poor’s.

Yes, thank you. Just wondering if you had any sense of DSL port capacity versus DSL subscribers? In other words, how the carriers are trying to build out their footprint, given the strong DSL subscriber growth relative to cable and with the price cuts that should definitely continue, and whether there’s risk in the future to – a pause in spending to sort of see how it takes up.

There’s always that risk, but I would say that the universe that they’re trying to deploy into is broad enough to where you wouldn’t expect them to have capacity excess across their entire network. So there’s a risk that some stars may line up and you may see an impact there, but I would say in general they’re adding capacity in multiple areas, they’re going back and adding additional capacity where their subscriber net adds have outgrown the infrastructure that’s already installed. So there’s potential those would line up, but I would say this is a very, very broad network that they’re deploying into.

Thanks. And just last question, can you rank for the new product categories, gross margin relative to corporate average?

Well NetVanta continues to lead in terms of gross margin, probably followed by optical access, followed by DSLAMs.

Thank you.

I would like to, especially this conference call, would like to thank everybody that took out time from their busy day to join us, to ask us questions about our company, about the people involved and the business outlook that we have. We thank you for being with us here this morning. We hope that you continue for the long term, as we do, your interest in our company, and once again, thank you for being with us.

Thank you. Ladies and gentlemen, this concludes today’s conference call, you may now disconnect.