ADTRAN Holdings Inc (ADTN) 2006 Q1 法說會逐字稿

Good morning, my name is Tasha. 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. All lines have been placed on mute to prevent any background noise. [OPERATOR INSTRUCTIONS] During the course of the conference call, ADTRAN representatives expect to make forward-looking statements which reflect management's best judgement 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, 2005. These risks and uncertainties could cause actual results to differ materially from those in forward-looking statements which maybe made during the call. In addition, ADTRAN will use certain non-GAAP measures in the conference call this morning. ADTRAN will post on the Investor Relations section of its website at www.ADTRAN.com reconciliations of these non-GAAP measures to the most comparable GAAP measure including reconciliations presented in ADTRAN's first quarter earnings release. Speaking on today's call from ADTRAN are Mr. Tom Stanton, Chief Executive Officer; Mr. Danny Windham, President and Chief Operating Officer; and Mr. Jim Matthews, Senior Vice President and Chief Financial Officer. Mr. Stanton you may begin your conference.

Thank you, Tasha and good morning, everyone. Thank you for joining us for our first quarter 2006 conference call. As Tasha mentioned, with me this morning are Danny Windham, President and Chief Operating Officer and Jim Matthews, Senior Vice President and Chief Financial Officer. In the first quarter we introduced two significant product lines and continued to advance our sales efforts in our primary growth areas of Broadband Access, Optical Access, and NetVanta. But first I would like to discuss some specifics about the quarter.

As we reported on March 10th, the order rate increases we typically experience in the latter portion of the first quarter, began to materialize later than anticipated, negatively impacting revenue for the quarter. However, our primary growth areas compromising of Broadband Access, Optical Access and NetVanta showed strong year-over-year revenue increases. Combined, these areas contributed about 33% of total revenue in the first quarter of 2006. We continue to see robust order acceleration in these areas. As expected, HDSL T1 saw a decline in revenues mainly due to seasonality. A secondary driver to the decline was realignment of distribution centers at a major customer, which allowed the customer to better utilize their inventory. Recent order activity with this customer suggests that this distribution center realignment has completed. As most are aware, the fourth quarter was an especially strong quarter for Optical Access. Although shipments in Q1 moderated from a historically high Q4, the outlook remains extremely positive for this growth area. Broadband Access showed strength through the quarter, overcoming the typical seasonality seen in our other businesses.

Moving to our enterprise business. NetVanta experienced another quarter of record revenues with strong growth both sequentially and year-over-year. We believe the success was driven by our continued efforts in driving traditional enterprise channel awareness coupled with our growing success in obtaining carrier distribution. These achievements will continue to drive meaningful success in this business. As I mentioned earlier, the first quarter marked the introduction of two significant product lines for ADTRAN. Our Total Access 5,000 platform, which significantly broadens range of Broadband Access coverage, as it is targeted to address the growing requirements for applications including Metro ethernet, IPTV, the movement towards IP Centric Networks, and new DSL and fiber technologies. Additionally the first quarter marked the introduction of the NetVanta 7100 series of IP PBX products. Initial feedback has been overwhelming positive and we are encouraged that this new family of products will significantly add to our value proposition for our primary target of small and medium size business. Finally, during the quarter, we announced the acquisition of all intellectual property and worldwide property rights from Luminous Networks. This purchase will accelerate our developments in current and future ADTRAN platforms. In addition, we will continue to manufacture selected Luminous products.

Going forward, we believe our primary growth areas will continue to see strength based on market share gains related to both current and future product introductions and customer spending trends. Our traditional product areas will continue to track on a macro level with Enterprise Demand, wireless network expansions and wire line capacity upgrades. I would like Jim Matthews to review our results and our guidance for the second quarter and year 2006. We will then open the conference for questions. Jim?

Thank you, Tom and good morning, everyone. Revenue for the fourth quarter was -- I am sorry revenue for the first quarter was $108.6 million up from $104.6 million from Q1 of 2005. For the total company, systems revenue was $65.4 million in Q1, 2006 up 16% from $56.2 million in Q1 of '05. Comparing Q1 of '06 to the same period in the prior year, the increase in systems revenue was primarily do to an increase in Broadband Access, Optical Access, and NetVanta product revenues partially offset by a decline in 303 concentrator and integrated access device revenues. HDSL T1 product revenue was $41.1 million for Q1 of '06 down from $45.1 million in Q1 of '05. Comparing Q1 of '06 to the same period of prior year, the decrease in HDSL T1 is attributable to the realignment of distribution centers in a major customer and a decline in DSU/CSU revenues. Visible business transport Total Reach was $2.2 million in Q1 of '06 down from $3.2 million in Q1 of '05. Carrier Networks division revenues were $81.2 million in Q1, up from $76.4 million in Q1 of '05. Comparing Q1of '06 to the same period the prior 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, and HDSL revenues. Enterprise Networks division revenue were $27.4 million in Q1, down in $28.1 million in Q1 of '05. Comparing Q1 of '06 to the same period the prior year, the decrease in Enterprise Networks division revenues was primarily due to a decrease in T1 and Integrated Access device product revenues partially offset by an increase in NetVanta product revenues.

As is typical, due to seasonality, revenues decreased sequentially in the first quarter. Total revenues decreased to $108.6 million in Q1 of 2006 from $140.6 million in Q4 of '05. DBT Total Reach revenues decreased to $2.2 million in Q1 of 2006 from $2.9 million in Q4 of 2005. HDSL T1 revenues decreased to $41.1 million in Q1 of '06 from $61.1 -- $61.1 million in Q4 of '05 reflecting the effective realignment in distribution centers by a large carrier and seasonality. Distance revenues decreased to $65.4 million in Q1 of '06 from $76.6 million in Q4 of '05. However Broadband Access and NetVanta overcame seasonality due to continuing market share traction. Also on a sequential basis Carrier Network Division revenues decreased to $81.2 million in Q1 of '06 from $106.9 million in Q4 of '05 and Enterprise Networks division revenues decreased to $27.4 million from $33.7 million in Q4 of '05. Revenue from the International sector was 5% for the quarter compared to 8% for Q1 of '05.

Gross margin was 59.4% of revenue during the first quarter of 2006 compared to 57.6% for Q1 of '05. Increasing gross margin percentage is primarily the result of favorable product mix, continuing improvements in manufacturing efficiencies and product cost reductions. Research and development expenses were $17.8 million in Q1 of '06 compared to $16.3 million in Q1 of '05. Comparing Q1 of '06 to the same period the prior year, the increase was primarily due to stock-based compensation expense recognized in Q1 of '06 of $927,000 and higher Telcordia and other develop expenses incurred in Q1 of '06. Selling, general and administrative expenses were $24.8 million in Q1 of '06 compared to $22.9 million in Q1 of '05. The increase was primarily due to stock-based compensation expense recognized in Q1 of '06 of $957,000 in increased selling costs. Other income, net of interest expense, was $4.1 million in Q1 of 2006 compared to $2.8 million in Q1 of '05. This increase is primarily related to higher investment balances and higher interest rates related to fixed income securities.

The company's income tax provision rate was unusually high in the first quarter. This is attributable to a delay in the patches of legislation extending to Federal R&D tax credit. The result of this delay was an increase in the tax rate of about 90 basis points in the first quarters -- in the first quarter. We anticipate this legislation will be passed in the second quarter and will apply retroactivity. GAAP earnings per share assuming dilution for Q1 of '06 were $0.21 compared to $0.20 for Q1 of '05. Non-GAAP earnings per share assuming dilution were $0.23 for Q1 of '06. Non-GAAP earnings per share exclude the effect of stock compensation expense for employee stock options associated with the application of FAS 123R which [answering adoptive] effect of January 1, 2006. As ADTRAN begins to apply FAS 123R it believes that it is useful to investors to understand how the expenses associated with the application of the FAS 123R are reflected in its results of operations. The presentation of these non-GAAP measures permits both investors and management to more readily compare past results with future results and to better understand ADTRAN's performance over the periods presented.

From a balance sheet perspective, inventories decreased $2 million from the prior quarter to approximately $48 million. Net trade accounts receivable decreased approximately $4 million from the prior quarter to $62 million due to decreased revenues. DSOs came in at 52 days for the first quarter up from 42 days for the fourth quarter of 2005 but down from 56 days for the first quarter of 2005. Net cash provided by operating activities came in at approximately $23 million for the three months ended March 31, 2006. Unrestricted cash and marketable securities totaled $399 million at quarter end, after paying $6.9 million in dividends during the quarter.

Now, we would like to discuss guidance for the year and second quarter of 2006. Revenue for the year is expected to range from $545 million to $570 million. GAAP earnings per share for the year, assuming dilution, are expected to range from $1.30 to $1.40. Non-GAAP pro forma earnings per share for the year, assuming dilution, are expected to range from $1.38 to $1.48. Revenue for the second quarter of 2006 is expected to range from 120 million to $125 million. GAAP earnings per share for the second quarter of 2006, assuming dilution, are expected to range from $0.25 to $0.27. Non-GAAP earnings per share for the second quarter of 2006, assuming dilution, are expected to range from $0.27 to $0.29. Non-GAAP earnings per share for the year and second quarter 2006, exclude the effect of stock compensation expense, resulting from the application of FAS 123R. Tom, back to you.

Thanks, Jim. Okay Tasha at this point we're ready to answer any questions that may be out there.

[OPERATOR INSTRUCTIONS] Cobb Sadler, Deutsche Bank.

Thanks a lot. Quick question on -- on the Optical business. Can you tell us -- I guess your customer base is much different this year than it was last year, and could you tell us what your visibility is into deployment patterns from one or two RBOCs that you may have won, or one or two major wireless carriers that you may have won? And then also can you give us a rough mix on OC48 versus lower speed deployments? Thanks a lot.

Sure, this is Tom. The -- as far as any type of deployment characteristics with our newer customers, versus some of our older customers, I would say we haven't seen a significant change. I would say that our opinion, at this point in time, is that our Optical Access products will probably see seasonality, typical to our other products, although we are hopeful that we will continue to gain market share at such a rate that periodically we would overcome that.

As far as OC48, OC48 is still in the kind of early trial-type stages. So we have not started shipping that for revenue at this point in time.

Okay. Thanks a lot.

Okay.

Vivek Arya, Merrill Lynch

Thank you. The device guidance, Tom, is lower than what was suggested at the end of last quarter's earnings call, and certainly when you preannounce the results the expectation was that for the entire year that -- that you will not be changing your guidance. But from the new numbers that have been given, it suggests that you have lowered guidance for the entire year also. So can you please give us a sense for what has changed between when you pre-announced your earnings for this quarter versus now when you're giving the guidance for the whole year?

Sure. This is Tom again. I think the real -- the answer to that question is -- is we did come within our revised range on revenue and earnings for Q1. But having said that, we would have liked to have done better. And based off of where we ended up in Q1, and the fact that we have very limited visibility, our typical backlog is a matter of a couple weeks, our typical lead times on orders is a matter of a couple of weeks, so we have very limited visibility, and it just, at this point in time, it feels prudent based off of where we ended up in Q1 to revise the full year number.

I see. And Tom, can you give us a sense for what could cause some upside surprise in the remainder of the year versus what could be some downside risk when you look at it from a segment and a product perspective?

Sure. The biggest -- the biggest, I think probably, variable that we have out there, tangible variable we have out there, is the timing of revenue, associated with some of our Optical products. We believe that this year we'll see good -- we've seen good momentum even so far this year in -- in moving the sales process forward in either getting into trials or getting out of trials. But trying to time when some of these large carriers actually turn on is probably difficult. I think DSLAMs were -- DSLAMs are -- have continued to grow. I think we are still expecting growth out of DSLAMs. I think that the focus of the larger carriers from time to time changes although I would say it's probably swinging back towards our way here. So, I would say probably -- it would probably be just in the new product area in trying to time the traction of new products being adopted.

And one last question for Jim. Jim, there was a big drop in accounts payable and I just wanted to just clarify whether there was any unusual supplier discount or anything unusually that you saw from a balance sheet perspective? Thanks.

Vivek, no, not really. It was only in regards to the timing of the payments as we approached the end of the quarter. So nothing unusual.

And book to bill for the quarter? A lot more than one?

Nothing unusual there as well.

Okay. Thank you.

Andy Schopick, Nutmeg Securities.

Jim, I going to ask you to clarify one of your comments regarding the tax rate and the anticipated tax provision for the year assuming any pending legislation passes as you anticipate. What would -- there will obviously be some retro -- some future readjustment of the tax rate that we see here in the first quarter to a somewhat lower rate. What full year rate would you guide us too?

Yes, Andy, I think it would be reasonable to expect that I mentioned that we saw a 90 basis point difference because of the delay in legislation. So reducing the three month gap rate by 90 basis points would be a good estimation of what we expect the year to be.

Fine.

Okay, and Andy, the catchup, so to speak, we anticipate should happen in the second quarter when the legislation is enacted.

Okay. So we would actually see more than a 90 basis kind of readjustment downward and then we'd see it more normalized in the second half of the year.

That is correct.

Any comment about trials, Optical Access trials? And any comment about consolidation within the large carrier environment and how that -- how you anticipate that might impact your business going forward?

Sure, on the trial front, I would say we have progressed at the normal kind of large carrier pace which is in most cases it takes you a quarter or so to move to the next gate and I would say that's where we are at in the ongoing active deals we're working on. And we're still very hopeful that we'll continue to see those close in the first half as well as the second half of this year. The second piece of the question was -- oh, consolidation. Well of course the biggest consolidation in the near term is the AT&T BellSouth and we're very hopeful that that will end up being a positive event for ADTRAN. Right now, as many people are aware, we sell very few of our system level products to Bell South and in fact I would say on a percentage of our product portfolio purchased they're probably the lowest percentage versus the other RBOCs. So we're hopeful that we at the approvals that we've already gone through in AT&T may prove beneficial there but we'll have to wait and see.

And lastly net cash flow from operations, did you say 43 million?

I'm sorry, Andy, it was 23 million.

I thought so, thank you.

23 million.

Ken Muth, Robert W. Baird

Good morning. On the HDSL downside is that the area where you say the most drop-off from the customer from an international perspective? Because obviously your international revenues came in -- it dropped off pretty substantially, sequentially there.

No, I wouldn't say that was the most. I would think the -- of course the biggest customer that we have on the international front is Telstra. And as we mentioned before Telstra was going through a network build last year so we had expected that revenue to decline this year and then kind of moderate itself back to a run rate level as they start bringing new customers onto that network. I think probably the biggest decline and correct me here if I'm wrong, I think the biggest decline is actually probably in the DSLAM area.

That's correct.

Okay and then any color on the outside cabinet versus the central office mix on that DSLAM?

On a percentage basis, actually that we were -- just being as this is kind of our first year very large 1148 sales we were cautious on the seasonality effect of the 1148's, and they hung in there pretty well and we saw basically the same kind of split we saw in Q4 which is roughly 50/50 or so.

Okay and what do you -- longer term in that HDSL kind of category, what do you think is kind of an appropriate growth rate for that? I mean as we kind of had a really down sequential quarter here.

We have a down sequential quarter, I would say that the sequential decline that we saw last year at this time was fairly significant too, and what you saw through the rest of the year was basically a catchup to where HDSL basically was, I think, slightly up year-over-year. And at this point in time we don't see any reason to expect anything different. There's no technology out there that it is in the near term going to significantly change the landscape of what is being deployed. So we don't have that perfect crystal ball but our feeling at this point in time would be that we would see either flat to slightly grow, but probably more towards flat for this year.

Great, thank you.

Joe Chiasson, Susquehanna Financial

Thanks, good morning, guys. Jim, one quick question. Could you cover the 10% customers please?

Sure, Joe. This quarter, we had two 10% customers and that was SBC now AT&T at 22%, and Sprint at 14%.

Okay and then just one follow-up if I might. With respect to the sequential trends on the growth product areas, it sounded like the DSLAM and the Optical might have been down sequentially whereas NetVanta might have been up. Is that correct or could you go through that, please?

DSLAMs up, NetVanta up, Optical down.

Okay. Great, thank you.

Jason Ader, Thomas Weisel.

Yes, good morning, just a question on IADs, it seems like that was an area of weakness. What should we be expecting out of IADs and what are some of the trends there?

Yes, IAD revenues, this is Danny, for both quarter-over-quarter and year-over-year were down light slightly in fact possibly explainable just through the seasonality. It is our belief that the market for IADs has been soft because the customer base that is the primary consumer of IADs today is under pressure which is to see that customer base. And in fact going forward the TDM and ATM version of IADs, we believe, over time, will give way to IP versions of IADs. In fact going forward, we probably prefer to call that product an IP Business Gateway. And if you will combine IP Business Gateways with TDM and ATM ID we believe that is a growth market but the IP Business Gateway, segment of that, is in the early stages and it's just beginning to take off. In fact ADTRAN saw shipments in Q1 of IP Business GAteways for the first meaningful time and they are beginning to become a portion of our overall ID revenue that is noticeable.

Okay. And then just second question, maybe, Jim, you could respond to this. The last time that you guys had a hiccup like this you had talked about your order rates so far through the first quarter. So we're kind of two and a half weeks into April right now, how does April look so far?

Well, Jason, I would suggest that the order rate that we're now seeing in April reflect pretty much our anticipation on revenue levels for second quarter of 120 to $125 million. So hopefully that gives you enough color there.

And you said that the one customer that had the distribution realignment is kind of back on track?

Yes, we saw a noticeable uptick exiting the quarter. So we're hopeful that event has passed us.

Okay, thank you.

Simon Leopold, Morgan Keegan.

Thank you, I've got a couple, hopefully some quick ones here. The other income line in this quarter jumped up a bit from the past several quarters. Just wondering if there's something one time about that or whether we could look at other income maintaining a sort of a 4.1 million level going forward? If you can give us a little bit of explanation there. And then when we look at the product segments, it does sound like the NetVanta line did break through the 5% barrier again this quarter, a bit of a recovery. Just want to see if you can confirm that? And then the last item I want to ask about was, I've gotten the sense that the Optical products could rival your Broadband products in terms of total revenue contribution for the year. Just want to see if you can give us an update as to how you see the split falling out between Broadband and Optical. Thanks.

Sure Simon, Jim Matthews here. In terms of the other income line, other income net of interest expense for the year I think we can anticipate something in the range of 1.5 to 2%. Again other income net of interest expense. Yes it is up in the first quarter. If you look at the fourth quarter and actually look at the 10-K, we actually made a comment in the 10-K about a litigation accrual of $1 million in the fourth quarter that resolved itself in the first quarter for the accrued amount. So we did have an uptick sequentially but it was in large part because of that litigation accrual in the fourth quarter. So the $4 million that we saw in other income is really pretty reflective of current interest rates relating to our larger cash and marketable securities balance that we're now carrying on the balance sheet.

In terms of the question about NetVanta, NetVanta did exceed 5% of revenue for the quarter.

As far as DSLAM versus Optical for the year -- this is Tom -- we have been bullish on Optical Access growing this year. We're still absolutely just as bullish today as we were three months or six months ago. I think we're comfortable and have been comfortable in saying that on a percentage basis we would expect Optical Access to surpass DSLAM growth on a pure dollar basis. DSLAM's had a heck of a lot –- a bigger head start. So I think that that would be tougher to trying to time exactly when some of these larger carriers would come on in full swing, and trying to project that for this year, that would be real difficult.

Great. And just a quick follow up. Did you recognize revenue this quarter on the new TA 5000 and if not, what do you think it looks like in the second quarter?

We did not recognize revenue this quarter. We are in several trials in, actually exiting Q1, we were in several trials. We would expect that to start shipping towards the tail end of this quarter.

Great, thank you very much.

Okay.

Marcus Kupferschmidt, Lehman Brothers.

Hey good morning guys. Just want to explore the inventory firstly, could you explain a bit more about why the inventory's so high, why the returns are low relative to ADTRAN's traditional levels and maybe you could give a sense of finished goods now versus a quarter ago within the inventory?

Sure, I'll take a piece of that, and, Jim, you jump in. Inventory levels as an absolute are actually down and you're absolutely right the returns are actually down too. That is absolutely just a reflection of the revision that we had in our numbers and we started putting the breaks on inventory when we saw that the quarter wasn't going to rebound in the way that we had initially forecasted. And we were able to have some effect but not as much of an effect as we would have liked to had. Going forward you would expect us to manage our inventory the way we had historically with returns in the low to mid 4 range. And so I would -- there's change in philosophy there.

Hey Marc is your question in regards to the finished goods inventory level -- in relations to total inventory they were carrying, it is fairly consistent to what we've had in the prior quarters as well.

Got it. In terms of operating expenses, R&D came in noticeably higher than what I would have assumed, is that kind of a one-time thing, a function of something like Telcordia which you mentioned, or is this kind of the run rate, it's stable, it's going grow from here over the course of the year? Can you help us understand that?

As far as the R&D expenditure levels, Marcus, as I mentioned, we did see the -- the beginnings of the impact of 123R to the tune of about $927,000. Incremental to that, or in addition to that, we did see a sequential increase in Telcordia spend. We anticipate Telcordia spend to continue through the year. And we also had a bit of an increase in other R&D type expenses. In terms of Telcordia expenses going through, say, the latter half of this year potentially we may see an increase in the latter half of this year on that line, on that particular line. But overall, R&D expense levels should come in for the year in the low teens in terms of percent to total revenues.

Okay and then just to clarify something -- I just want to understand, in terms of HDSL, if I remember correctly, a quarter ago when we talked about the year -- yearly outlook, we talked about a mid to high single digit outlook? Do I remember that right?

Well, no, I think what we are trying to do is put our total bucket of traditional products, which would include things like HDSL, it includes IADs, it includes M13's, kind of that whole product basket and we've been saying kind of mid to high single digits type growth out of that, what we call our traditional product line. So HDSL would just be just one piece of that.

All right, so I guess because I'm wondering, do you assume the inventory snap back occurs right way for HDSL in 2Q?

The inventory you mean -- ?

Snap back.

The customer effect?

Yes.

Yes, the answer to that is yes. I mean this is -- when in effect, one of our customers did is they had multiple warehouse locations and they allowed different reasons to start buying out of those multiple warehouse locations which prior to that they were confined to buying in the warehouse that was within their region. So, you would expect that once those inventories are drawn down to what they consider to be an acceptable level, that you would start seeing run rate purchases reflect what the actual install rates were.

Alright, just can we clarify add back, let's say roughly $10 million to adjust for that kind of inventory snap back, would you say that the growth rate you're looking for, for the full year, for HDSL is the same thing you would have thought a quarter ago?

I would say that for our overall product area we're looking at mid to high single digits. If you look at the growth rate we've seen in the last couple of years for HDSL it's probably been in the low single digits. I don't see any major changes in HDSL.

Thanks.

Okay.

Tim Daubenspeck, Pacific Crest Securities.

Thank you, just to clarify an earlier comment, you talked about DSLAM, some of your carriers focus changes over time, can you give us a little color on that comment and maybe expectations for your kind of DSLAM growth rate for 2006?

Yes, yes. The -- what I'm saying is that DSLAM's kind of -- depending on the period of time you're talking, through over the last three or four years, they get hot for a quarter and everything is focused on footprint expansion and new DSL growth and then they -- although they always kind of stay near the front burner. Sometimes they take a seat back to some new thing. And in general, we would think that the DSLAM market is a very robust market. It's a market that still has, in general, a large focus from the carriers, and we don't see that changing anytime in the near future. And in fact, sometimes it heats up even more than kind of the general temperature that it has been over the last couple of years.

In terms of -- I mean, are we looking at a kind of a single digit or double digit growth rate for you guys in DSLAM this year?

Well, I would hope we would be past a single digit number but I don't know if we've actually given specific guidance on DSLAM growth versus guidance for the entire Company. I think if you take a look at the numbers and the fact that we're looking at single digit growth for our traditional project -- products, that would assume that our new products would grow at a higher than single digit rate.

Okay.

Which over the last couple of years they've done a good job of doing and we're still relatively early into the market share game for most of these products.

Okay. And then the second question, in regards to HDSL, have you seen any change in the competitive environment? You know it appears that ADC might be pulling back a little bit. Have you seen that impact or have you seen that in the market at all?

We've seen the change, we have not seen the impact yet.

Alright. Great, thank you very much.

Scott Coleman, Morgan Stanley

Great, thanks, good morning, guys. I'm just wondering as you look out over the course of the year, in the past you've talked about 2Q being strong and certainly your guidance reflecting that, 3Q being strong, and then 4Q tailing off a little bit seasonally. Is that still your expectation with your full year guidance?

Yes, I'd modify that slightly, I mean definitely Q2 is strong, Q3 is historically the strongest quarter, just over the long term, Q4 ends up being -- Q4 can go either way. So there's -- and I don't want to say it's 50/50 but there are times where we'll actually see an increase in Q3 to Q4 and then are times where we'll see it flat and then there are times we'll see it down. So that's kind a grab bag quarter. But I think you're right on the other three.

Okay. And I'm curious, Tom, what is the assumption that's baked into your full year guidance here? Is it, given that it's a bit of a grab bag, is it sort of a flattish Q4 right now?

You know we're stuck with the fact that we have fairly limited visibility, as I mentioned before. And we really are trying to take a look at the overall product set. When you start talking about Q3 versus Q4, that's a difficult thing for us to gauge because it has to do with when actually some of these products get ratified and get pulled off there. So that's a level of detail that I just don't think we're prepared to give.

Right. Okay. And on the International side, and you touched upon this earlier, you brought on a new salesperson, I believe in Q3 of last year. Yet the International sales this quarter, I believe, are the lowest dollar figure since early 2004. Can you just give us a little more detail on your expectations, whether new markets or new products and how you can deeper penetrate International?

Let me ask Danny to touch on that.

Yes Scott, the revenue declines that we have seen in Telstra for the last two quarters really are a result of where Telstra is in their business cycle with ADTRAN. The fact that they built out their business DSL network in earlier parts of 2005, and we are now at a spot where our revenues into Telstra are dependent upon Telstra's success and putting new customers on that network. Now, even though Telstra has been a significant portion of our international revenue historically, and since Telstra is down, our International revenues are down there are a number of bright spots of things that are going on in the International marketplace. Paris did come aboard in the third quarter of 2005 and his mission since then has been two-fold. One, to identify carriers outside of Telstra that could be a new Telstra for us over time. Developing international carrier accounts as a long-term investment and there are some new carrier customers that show promise in Asia, specifically in Canada, and some in South America. And the second effort has been to establish access to small and medium sized businesses in Europe. So that effort is something that I would classify as still being in a foundation building stage. We have been going through the process of enhancing and localizing our products to prepare them to go into that marketplace. Recruiting new employees in those geographies and recruiting distributors. We're at a spot where I believe those efforts will have concluded by the end of Q2 and will in be a reseller recruitment and end user demand generation phase by Q3 and hopefully we'll see first customer shipments in that region begin in Q3.

Okay. Great, I really appreciate the detail, Danny, thanks.

John Anthony, SG Cowen & Co.

Good morning guys. A couple of questions. First on Luminous, I think you guys mentioned you're going continue on a selective basis, the manufacture of some of the Luminous products. Can you talk about which ones and talk about any contribution?

Yes, I think we can talk about a sub set of those. The E series products or product that's actually there is some good customer demand on. You know, good for the size company that it was. So those are products that -- that we will probably continue, they're relative up-to-date as far as the kind of core technology. So those are products that we would be -- they have an M series product also, and a C series product and we'll probably be manufacturing a smaller sub set of those products. And as far as any type of revenue associated specifically with them let me stress initially that we bought the company for the technology. I think we got a very good price on the technology. It is a technology that makes sense in some of our other products including the Total Access 5000. It was a cheaper way to do it than to build some of the kind of the ASIC development or FPGA stuff ourselves and it actually got us to market quicker. Having said that, some of these other products do seem to have a viable market space and a relatively stable customer base. So, we'll continue to push forward, but we haven't broken out the revenue specifically for Luminous because it really was more of a technology acquisition.

Okay and then with OSMINE, can you tell us when you expect to have OSMINE completed for the TA 5000 and the OC-48 [box]?

The answer to that is, on the 5000 -- I can't because it's kind of like when I would complete OSMINEon the 6100, that's an ongoing process, and it's something that we've had the 6100 out now for three years, and as we introduce new products and new cards into it, we go back through the OSMINE process. So I would characterize the Total Access 5000 of having some OSMINE done fairly quickly out of the gate and then continuing to build on that over the next two to three years or so. On the OC-48, I just really don't have that date in front of me, John, so I would have to get back to you on that.

Okay. Also, on the folks that are looking at the TA 5000, are they looking at it to deploy in kind of a one-off situation where they're just deploying that, or are they deploying that in conjunction with any of the others like the 1148 or 1124 or something -- whatever?

The answer to that is both. The problem we have with talking about the 5000 is it's a many bladed Swiss knife and it's infused in particular configurations and different applications. I would -- let me just kind of cover the applications. There are areas where it is used, in fact a lot of areas where it's going to be used as a broadband DLC. So delivering [PODS] and traditional broadband as well as traditional TDM services. And there's strong demand for that, and initially that's what it's coming out as. There's also a demand out there, and we have trials going out there, where it's actually used as an aggravation device for 1100S and 1148s. So I thing it's the second piece that you were talking about. And so the answer is, this year, I believe, we will be shipping in both of those configurations.

And I know that someone asked this before but I didn't quite catch the answer. Are you expecting any meaningful revenue from the 5000 this year?

I think there's definitely the potential of meaningful revenue and I'm more encouraged by the fact that the customer base that we are initially selling into, which is the independent tier 2 and tier 3 customer base, is typically faster moving than some of the larger carriers. So I'm hopeful that we may actually see some. I will tell you that we did not -- we don't plan on a significant amount but we hope to be pleasantly surprised.

Okay. And last question is about the guidance. I understand your desire to be conservative here, but if you just kind of walk through the math and your comments about HDSL being flat to slightly up, and there being a robust DSLAM environment, it's almost difficult to imagine that you guys are going to grow 11%, which is the, on an annual basis, which is the top end of your guidance. So that would imply, if I hold all your traditional businesses flat, which would be inconsistent with your expectation that they grow with the market, that would imply that your new businesses would be decelerating off of the seasonally slow March quarter. So can you just talk a little bit about whether you do expect your new business growth to decline going forward and is that where you kind of expect the deceleration in the growth rate?

Well, I will tell you we don't expect our new business growth rate to decelerate and I don't see any reason, take a look at the momentum we have in our new product area for it to decelerate. In fact I would say we're more excited today than we were three months ago. As far as how did that reflect in the overall guidance, I didn't go all the way through your math, it seems to be -- seems that you have kind of a sound perspective on things. I would just say that we're -- that trying to judge a full year's worth of revenue that is always difficult. And we're giving it the best shot we can.

Thanks, guys.

Paul Silverstein, Credit Suisse.

Thanks. Tom, a couple questions if I might. First, can you -- you had mentioned about a pickup late in the quarter, that business has been very soft early. Can you tell us what the linearity was for the quarter?

I don't know specifically, I would say definitely back end, which is typical and I would say with a large percentage being in actually the March month. So --

Would it be fair to say 50 plus% was March?

I don't think so. I think that would be overstating it.

Okay. Are each of DSLAM Optical and NetVanta past 5%?

Yes.

Yes.

Yes.

Okay. With respect to your comments on HDSL and IAD, if I could -- I know you've been through it a couple times, I apologize, I'm just a little bit confused. I thought I'd heard you say that off the weak first quarter you're still projecting roughly flat HDSL revenues for the year and I thought I heard Danny talk about all of the IP IAD business is picking up. You have soft legacy circuit and ATM based IADs and that business is looking roughly flat for the year. But also thought I heard you say that you're projecting up mid single digits for those legacy or traditional businesses. So if you could just clarify?

Yes. You're exactly right and the problem we have in all of these businesses is especially the IAD and HDSL business where we have a significant amount of market share, the market share gains going forward aren't as -- won't have as much impact. So to the extent that we grow those revenues, we're kind of held hostage to some extent by the growth in the market. And in HDSL, and to some extent IADs, of course are overall economically driven by growth in the IT spending environment. So some of that is a crystal ball. We have some other areas in there, which have some good growth potentials. I had mentioned before M13's. Jim had mentioned one of the downsizes was 303 concentrators where we also have quite a few wireless products that would fall inside that traditional product mix. The MX series we introduced last year, the 410s and the 3300 MX series which are targeted towards wireless carriers fall within those areas. And so we have another -- enough other things in the fire for us to feel comfortable with that number. Having full realization that two big pieces of that are driven by kind of larger factors than what it is we do as far as selling.

Alright and Tom again, my apologies but I just want to make sure I understand, are you, right now guiding for flat or guiding for up single digits in those combined businesses?

I would -- our guidance is still -- I'm just going tell flat to [upswing] -- flat to slightly up.

Okay.

Single digits, yes.

With respect to HDSL, is there anything else going on in the marketplace, we've heard some wireless carriers talk about moving to the higher [ban] with increments and I think Cingular has spoken about pulling Optical fibers, right to the south side. I realize there're technical and economic issues involved but is there something more going on in the HDSL market that would account for weakness, current weakness and perhaps for on going future weakness in that business?

Truly, nothing that we are aware of and we have a fairly broad Optical product set at this point. Especially when you're talking about feeding cell sites. So you would think that we would be actively involved in some of those larger opportunities. And I can tell you just from the sense that we have, there has been pressure since the beginning of fiber deployments, for fiber to get farther and deeper into the access space that's been an on going thing. I don't think we've hit any type of inflection point. I think that the amount of pressure we are seeing today is consistent with the amount of pressure we saw two years ago. And it's just this constant push for fiber. But I don't see anything that would make me think anything has changed dramatically.

Okay, and finally, briefly, AT&T has just started its Project Lightspeed rollout, BellSouth appears to be on the verge of starting its [fiber] rollout. There's no evidence that there's any shift in budget priorities away from DSL to the fiber based platforms or away from pure DSL to the hybrid fiber based platforms?

Haven't seen that shift at all.

Okay. Thanks a lot.

Eric Buck, Brean Murray.

Yes, thank you. Actually my question was answered, thanks.

Todd Koffman, Raymond James.

Thank you, Jim, when I look at your new product segments, it looks as though your Optical Access products sell off the table, maybe down as much as 50% sequentially, and there hasn't been a lot of talk about that on the call. Am I way off base on that or am I reasonably accurate and if I am accurate what's the reasoning behind such weakness in your Optical Access products?

Well, we did mention, Todd, that Optical Access was sequentially down. And we also mentioned that we feel -- continue to feel very, very good about the opportunities that we had before with Optical Access.

Yes, but, had your Optical Access been up a little sequentially, you guys were in striking range of actually meeting your original March quarter numbers according to my guesstimates and so your Optical Access business was unusually weak. Can we get any more color on that?

Let me give you a little bit of color. You can look at Optical Access may have been unusually weak, I wouldn't characterize it that way, especially if you look at the trend over any period of time. I would say Q4 was a very good quarter for Optical Access. And the overall year was good but Q4 was very good of Optical Access. And what we saw and some of those were, you've got to get them out there. They have to build them out before a period of time and then that project is over with. In general, the baseline for Optical Access and even the activity we saw in Q1 was very good, we're very happy with it. We expect it to continue to grow. We did have a very good Q4 for Optical Access.

Well, Tom, just a follow up. Would you say that had the Optical Access not had this little bit a pothole. You might have been able to pull off the quarter from your original, original guidance?

That's a high -- I think it would have been difficult, because I do think, we saw weakness, pretty much across the board, which is typical. And so we had some kind of singular events in some of our other business, I don't know I think that would have been tough. But, let me just make sure that you -- because I know, Todd, that you kind -- I'm sure you have numbers that go back for some period of time. I don't know if I would consider Q1 on to be a pot hole, or Q4 just to be a big hill. I think if you look at it over any period of time. Even a relatively short period of time, you would see Q4 to be a hill and you would see Q1 kind of being right back in line and continuing to trend on up.

Fair enough, thank you, good luck.

Thank you.

Ehud Gelblum, J.P. Morgan.

Hi, thank you very much. Can you hear me?

Kind of.

Okay I'll try and talk slowly. A couple of questions. First of all, again on the guidance. The difference between your original guidance for this quarter and the revised guidance that you hit was 20 million. And the difference between your full year guidance originally and your new full year guidance from this morning is 20 million. So it seems as though what you did with your full year guidance was just altered by the shortfall in Q1. That doesn't totally jive, however, with the concept that order growth looks very similar to last year but is pushed out by two weeks. If you take that in conjunction with your new guidance for Q2 which is below what I had and I believe most of the Street had for Q2. It pushes a lot of things out in Q3 and Q4. You commented that Q -- Q4's is sort of a tossup. It does look as though you're still looking for a lot coming out of the back half of the year. Can you just give us the breakdown as to how you came up with a new full year guidance, was it really looking at the 20 million that came out of the first quarter and taken out of the full year guidance or was it some more [inaudible] analogy involved?

I think that the way you're thinking about it makes logical sense and no, we didn't just look at the 20 million coming out of Q1 and just kind of doing the easy math on that. I think if we were going to take that approach, we could have took a look at full year guidance at an early point and time. For instance, when we revised the Q1 number, what we wanted to do and the reason we couldn't do it at that point in time is Q1 in as far as the re-acceleration of the order rate in Q1 is always one of those things you don't know until you get through it. And I think that all of the answers are within the numbers that -- that we have presented. If you take a look at the Q2 guidance, and what we anticipate in Q2, which gives you a flavor of where you think we are with the order rate at this point and time. They're absolutely are on going positive things we expect to happen in the second half of this year. I think the story is out there. As to exactly what it is we did and why we did it.

Okay. Is it still correct to characterize what you are seeing [there] the order strength be similar to what you saw last year but just two weeks later?

No, I would -- here again I would try to point you back toward our Q2 guidance. And if you can, get a sense per what the order rate is based off of our Q2 guidance.

Okay. So I'll have to [sit] with that. That's fine. Question, Verizon has down big it appears the first time in several quarters, they didn't make the 10% list. I'm wondering what happened there and I'm wondering if that's the distribution realignment that you were speaking about before, to make sure that's one issue we're talking about not two different issues?

Okay, here -- it's tough for me especially when we talk about any change in any distribution strategy of a customer for me to give names. I would say that we had one event in Q1 associated with HDSL and inventory.

Okay. Thank you, that's actually very helpful. Moving to NetVanta it now appears it was strong this quarter and there's a 5% contributed revenue. Part of the reason it's probably a 5% contributor is that HDSL lost so much as an Optical Access and so you had to reset your revenue for this quarter. I'm wondering if at the previous revenue range of 127 to 131, wouldn't NetVanta still have been a 5% contributor revenue?

The answer to that is yes. The answer is yes.

Okay. That's very helpful and does show the growth there. Lastly, as we look at HDSL, and again I might be beating a dead horse and I apologize for that. It does appear that there have always been trends that are generally moving against it. As people move towards Optical and T3's even. Do envision the time at some point without knowing when, when say over the next thee or five years at some point, we'll put it out that far, that HDSL actually just becomes a decliner and is just going to be a declining business for you or do you think that this is -- will continue to always be flat or up?

No, no, no, -- I don't think that there's any business we are in that at some point in time won't l become a decliner. I don't think HDSL is any different than that. I think that the key for us and historically it's been the key to us is to make sure we gravitate towards newer technologies that are growing at a faster rates than declines in our older technologies. I think the time frame you're talking about which is three to five years is a reasonable time frame, although I would tell you that some of our other traditional products have lasted much longer. I don't see anything out there today that is grabbing significant market share. I will tell you that at some point in time there will be that animal, it just doesn't exist today.

Okay and I'm sure you'll be there. Last thing. [inaudible] You said then that it was constant around 50/50 between CO versus outside [plant remote terminal]. How do expect that to trend next quarter into the rest year? I have been under the impression outside plant remote terminal starts to taking over as the 1148 gets stronger, I just want to confirm that.

I think that that's a good impression. I will tell you we have some ongoing activities in central office market office share that may change that metric. But if you take a snap shot of the market share and customer base we have today I would expect outside plant remote terminal bigger -- to be bigger than CO. Having said that I hope that's not the case because that's means we won some market share at other larger carriers.

Okay. And is there any gross margin impact between one versus the other?

No. No.

Okay. Appreciate it, thank you so much.

Tasha this is the last question. I think we're actually running a little late.

Gina Sockolow, Urchin Partners.

Thank you, it's a two part question. First briefly, could you tell me if you're seeing any pricing impact from Huawei or other low end competitors in NetVanta or any of your enterprise products.

Today, we do not see impact from Huawei in our Enterprise class products. Our sales of NetVanta today are predominantly North America and Huawei does have the channel in place today to effectively read small and medium size customers in North America.

Right, and for Europe or Asia, any impact, any on your plans to expand there?

No not with regards to NetVanta products. I think from our look at the European space we feel very comfort with where we are from a cost and price perspective. There does seem to be any undo pressure that would make us nervous there.

Okay. Good. And the other questions more in the carrier space. There is a move afoot called ACTA, Advance Telecom Computing Architecture that supposedly is to standardize equipment for the carriers. So I suppose across new data and voice products. Are you seeing any inquiries from the service providers for your participation in either the standard setting for this [inaudible] or actual in products design?

I can tell you I think and I maybe way off base here, I think you're talking about kind a back plain standard protocol. If that is the one you're talking about? Is that the one?

Yes.

Okay and yes, I mean we've heard about that. It's been kind of talked about now maybe for a year and a half or so. We've have looked into that. I am personally not aware of any carrier specifically asking us to move that direction.

Okay. Great, thank you.

That's me. There maybe other people in the Company that know something but I know of nothing myself. Okay.

Yes, thank you.

Okay. Thank you. Okay. Tasha, I think we're done.

Thank you, this concludes today's conference call, you may now disconnect.