ADTRAN Holdings Inc (ADTN) 2007 Q1 法說會逐字稿

Good morning. I will be your conference operator today. At this time I would like to welcome everyone to ADTRAN's first quarter 2007 earnings release conference call. [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 cost, manufacturing efficiencies, and other risks detailed in our annual report on Form 10-K for the year ended December 31st, 2006. These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements which may be made during the call.

I would now like to turn the call over to Mr. Tom Stanton, CEO of ADTRAN. Sir, you may begin your conference.

Thank you, Lynn. Good morning, everyone. Thank you for joining us for our first quarter 2007 conference call. With me this morning is Jim Matthews, Senior Vice President and Chief Financial Officer. I would like to start the call by thanking the many people for sending their heartfelt thoughts and condolences for the passing of Mark Smith, ADTRAN's co-founder and Chairman. The many calls we received from around the world is a testament to the positive impact he had on our industry and to the many lives that he touched.

During the first quarter, we witnessed increased spending by carriers, most notably in the areas of Broadband Access and HDSL. Broadband Access revenues were up 33% sequentially. Although HDSL revenues were only up slightly sequentially on a year-over-year basis, HDSL revenues increased 23%. As most of you know, we typically experience a seasonal slow down in the first quarter with HDSL. Growing optical access revenues from Tier 1 carriers also offset typical seasonality in that category. Finally, we continue to see very good traction with our Internetworking Products as we witnessed another record quarter revenue in this product area -- here, again, in spite of typical seasonality.

During the quarter in Optical Access, we were successful in broadening our market potential by successfully closing new RFTs with Tier 1 and other carriers. We continue to anticipate our optical access revenues will ramp through 2007. In Broadband Access, the Total Access 5000 has secured awards across a broad spectrum of customers, from smaller Tier 3 to the largest Tier 1 carriers. Although we are very pleased with the number of awards today, we should remind you that the larger carriers require significant time to operationalize complex products like the Total Access 5000 platform. The Total Access 5000 platform significantly broadens our range of broadband access products, and it is targeted to address the growing requirements for applications including IPTV, metro Ethernet, and the movement toward IP-centric networks. Our activity around remote terminal and outside plant DSLAMs continue to increase, as we roll out new features and enable higher speed applications and seamless fiber and ethernet migration in our Total Access 1100 series products. In addition, we believe our Total Access 1100 series products will continue to gain momentum in conjunction with our Total Access 5000 platforms as carriers deploy next-generation services. We believe the amalgamation of these products provide the industry's best solution for next generation FTTx architectures.

Internetworking products comprising of NetVanta and IP Business Gateways had another record revenue quarter in spite of typical negative seasonality. This category continues to experience accelerating order flow as a result of very persistent efforts to improve enterprise channel focus and leverage carrier distribution. We continue to be enthusiastic about the increasing customer adoption of the NetVanta and IP Business Gateway 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 expansion, and wireline capacity upgrade. I would like Jim Matthews to review our results for the first quarter 2007. We will then open the conference call up for questions. Jim?

Thank you, Tom, and good morning. Revenue for the first quarter was $110.3 million, up from $108.6 million in Q1 of '06 and up from $109 million in Q4 of '06. As we stated during the fourth quarter conference call, in order to provide increased transparency in major product areas, the driver of business, we are providing new product category breakouts. These categories are Loop Access, Carrier Systems, and Business Networking. Loop Access comprised DDS and ISDN Total Reach products, HDSL products including Total Access 3000 based HDSL and TDM based SHDSL products, T1 and T3 TSUs, CSUs/DSUs, and TRACER fixed wireless products. Carrier Systems comprise broadband access products, including DSLAM products and the Total Access 5000. This category also includes optical access products, TA 1500 systems, 303 concentrator products, M13 multiplexer products and wireless backhaul products. Business Networking comprises Total Access integrated access devices and Internetworking products. Internetworking Products comprise our NetVanta product line and IP Business Gateways. Additionally, we are providing subcategory breakouts of product revenues for Broadband Access, Optical Access, and Internetworking Products to provide greater transparency of our primary growth areas. Also, we provide HDSL revenue as a subcategory. To provide the reporting of each of these categories, we have published them on our investor relations Web page at www.ADTRAN.com.

For the total company, loop access revenues were $51.2 million for the first quarter of 2007, up from $43.3 million in Q1 of '06 and slightly down from $51.8 million in Q4 of '06. Comparing Q1 of '07 to the same period the prior year, the increase in loop access product revenues were primarily attributable to an increase in HDSL revenues, partially offset by a decrease in enterprise T1 revenues. Carrier systems revenues were $39.6 million through Q1 of '07, down from $44.1 million in Q1 of '06, but up from $34.8 million in Q4 of '06. Comparing Q1 of '07 to Q1 of '06, the decrease in carrier systems revenues was primarily due to a revenue decrease in broadband access in M13 multiplexer products. Comparing Q1 '07 to Q4 '06, the increase in carrier systems revenues was primarily related to an improving carrier spending environment resulting in a substantial increase in broadband access revenues and growth in M13 multiplexer revenues.

Business networking revenues for Q1 '07 were $19.5 million, down from $21.3 million in Q1 of '06, and down from $22.5 million in Q4 of '06. The sequential decrease in business networking revenues were primarily related to typical seasonality and traditional integrated access device revenues, partially offset by a continuing increase in internetworking product revenues. HDSL product revenues were $43.8 million in Q1 of '07, up from $35.7 million in Q1 of '06 and up from $42.8 million in Q4 of '06. We saw HDSL growth across most of our customer base in Q1 of '07, allowing this product category to overcome typical seasonality seen in Q1.

Broadband Access product revenues for Q1 '07 were $18.3 million, down from $21 million in Q1 '06, but substantially up from $13.8 million in Q4 of '06. We saw sequential growth in both central office and outside plant remote terminal DSLAMs in spite of typical seasonality in Q1. Optical access revenues were $8.6 million for the first quarter of '07, up from $8.4 million in the first quarter of '06, but slightly down from $8.9 million in Q4 of '06 due to the negative effects of seasonality in Q1, partially offset by revenue increases relating to new business wins with Tier 1 carriers. In spite of typical seasonality, internetworking product revenues were a record $11.1 million in the first quarter of '07, up from $8.4 million in Q1 of '06 and up from $10.9 million in Q4 of '06. The increase in Internetworking Products is the result of accelerating order flow from very persistent efforts to improve enterprise channel focus and leverage carrier distribution. Carrier networks division revenues were $84.4 million for Q1 of '07, up from $81.2 million in Q1 of '06, and up from $79.3 million in Q4 of '06. Enterprise networks division revenues were at $25.9 million in Q1 of '07, down from $27.4 million in Q1 of '06 and down from $29.8 million in Q4 of '06. International revenue was $7.8 million for the first quarter of '07, up from $5.7 million in Q1 of '06 and down from $10.5 million in Q4 of '06. The increase in international revenue for the first quarter compared to Q1 of '06 was primarily due to an increase in Broadband Access product revenues. The decrease in international revenues in Q1 of '07 compared to Q4 of '06 primarily relates to seasonality. Gross margin was 59.6% of revenue for the first quarter of '07 compared to 59.4% for the first quarter of '06 and 58% for the fourth quarter of '06. The increase was attributable to increased volumes and favorable product mix.

Research and development expenses were $18.4 million in Q1 of '07, up from $17.8 million in Q1 of '06 and up from $17.1 million in Q4 of '06. The increases in research and development expenses were primarily attributable to an increase in customer specific product development activities in our broadband access product category. Selling, general, and administrative expenses were $26.5 million for Q1 of '07, up from $24.7 million in Q1 of '06 and up from $25.8 million in Q4 of '06. Comparing Q1 '07 to Q1 '06, the increase in selling, general, and administrative expenses was primarily attributable to an increase in sales and marketing activities related to new products and channel development in both domestic and international markets. Other income net of interest expense was $3.7 million in Q1 of '07, up from $3.4 million in Q1 of '06 and up from $3.1 million in Q4 of '06. Other income net of interest expense for Q1 of '07 included a pretax life insurance benefit of $1 million. The company's income tax provision rate was 31.25% for the first quarter of '07. The decrease in the first quarter tax rate from the prior year is primarily attributable to a benefit of $893,000 recorded in the first quarter, primarily relating to closure of tax audits from prior years. Earnings per share assuming dilution for Q1 '07 were $0.24, compared to $0.21 for Q1 of '06 and $0.24 for Q4 of '06.

From a balance sheet perspective, inventories decreased to $49 million at quarter end. Net trade accounts receivable were $56 million at quarter end, resulting in DSOs of 46 days for the first quarter compared to 52 days for the first quarter of '06. Net cash provided by operating activities came in at approximately $23 million for the 3 months ended March 31, '07. Unrestricted cash and marketable securities totalled $282 million at quarter end after paying $6.2 million in dividends during the quarter and after repurchasing 678,000 shares of common stock for $15.2 million during the quarter.

For the second quarter of 2007, we anticipate a sequential increase in revenue, typical to what we have seen in recent years. For the year 2007, we continue to anticipate year-over-year revenue growth. However, this growth will continue to be dependent on the health of wireless spending, the macro IT spending environment, the timing and performance of our optical access products awards at Tier 1 carriers as well as continued success with our NetVanta, IP Business Gateway, and Total Access 5000 product categories. We believe that our strong operating model will continue to generate significant profits and cash flow as history has proven, with our 2007 pretax earnings target exceeding 25% of revenues for the year. Tom, back to you.

Thank you, Jim. Okay, Lynn. At this point, I think we're ready to open up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from John Anthony with Cowen & Company.

Good morning, guys. Let me start by again offering my sympathies for ADTRAN's loss of Mark Smith.

Thank you, John.

A quick question. I know you guys don't want to give any explicit guidance, but can you give us any sort of magnitude for the sequential increase in June? If we look back historically, there is a wide range of what's been experienced in June, and given the commentary early on in the calls that Tom made, it sounds like you guys are fairly optimistic on some of the near term prospects. Could you give us any more detail?

Yeah, well, we are optimistic about our prospects. The difficulty that we have, as people on the call are well aware, is trying to time large carrier deployments on complex products. The commentary that Jim made, which was that we're expecting an increase in revenues that is typical of what we have seen in recent history, I think is probably the closest that we can get to that. It wouldn't at all surprise us to see the type of reaction we saw last year. I don't think there were really a whole lot of one-offs last year. But our business being as book and ship as it is, it's very difficult to tie a particular number down in such a short period of time.

Okay. And just a quick follow-up. If you kind of look out at some of the larger opportunities with the Tier 1s, can you tell us what kinds of applications the TA 5000 are being considered for? Is it standard ADSL2, VDSL? Are you seeing the platform being evaluated as a primary means of delivering triple play?

It's across the board. We have -- and let me speak to the larger carriers. We have carriers that are absolutely interested in moving forward with a triple play architecture. And those carriers, by the way, aren't just here in the U.S, although I think most of the near term success just because of timing of these things will probably -- let's say near term in regards to international versus domestic but will be here in the U.S. We have carriers that are looking at it for Ethernet over copper applications, which is more of -- I would call it a business Ethernet application similar to the metro Ethernet fiber type things that have happened in the past. And we have carriers that are looking at it for Ethernet to ATM migration. And it offers a substantial functional as well as cost advantage in trying to move ATM networks on to Ethernet cores. So I think those are probably the three biggest. One other piece is VDLC. It's just so far has got an awful lot of momentum and standard BDLC, which is broadband digital loop carrier which includes POT.

Great, thanks a lot, guys.

Thank you.

Your next question comes from Ken Muth of Robert Baird.

Hi, good morning. I am very sorry about Mark Smith. He was a very high quality person and I was fortunate enough to get to meet him multiple times. On the optical side, could you just give us an update on the number of trials that you have ongoing and the number of customer wins you have at this time?

Yeah, on optical, I think we alluded to some of the success that we had in the first quarter. We're still seeing very strong momentum, not just on operationalizing the things that we have won, but we're still winning new deals. And we did close an additional RFP in Q1 which has not started shipping and will take some type to start shipping for [cell site] access with a Tier 1 carrier. To be honest with you, Ken, I don't know the exact number of actual trials we have going on. We talked about trial activity more in light of the 5000, but I would say that we are not done winning all of the market share there. We think we can win with the 6100 platform and with our optical access in general. We are still pretty early in that cycle. Our focus has been trying to also materialize the wins that we have secured over the last 6 to 9 months and that's still an ongoing process. We did start seeing some revenue from some of these Tier 1 carriers in Q1 -- I would say was a small amount of revenue. We were pretty happy with it because of the spending constraints and the slow down that it forced on to the situation. But we did start seeing those shipping and we expect those to continue to ramp-up.

Okay, and then quickly on the NetVanta you guys have, you say you continue to see a positive improvement there. Is it more because you added the number of bars? Or you obviously added a large bar in this in Q1, did that have a positive impact already in the quarter? Is that something more second half '07 related?

We did add a very large bar in Q1. I would say that really hasn't materialized in Q1. We're very early in that and I would expect that to materialize through the course of this year. Our bar recruitment has significantly picked up. In fact, I've seen numbers since that reflect the fourth quarter and were up probably up 50% right now in registered bars. And we want to continue that momentum through this year. Here again, that will take time to play off. In the Internetworking Product area, the other real positive thing that we saw was continued pick up in our IP Gateway Business and as reflected in the award you talked about we actually now have Tier 1 carriers that are interested into pulling IP Gateways, which was kind of a movement that we were hoping to see at some point in the future.

Thank you very much.

Okay.

Your next question comes from the line of George Notter with Jefferies.

Hi, thanks very much. I wanted to ask a question about the TA 5000. You certainly understand the situation with respect to the timing of revenue recognition there. But can you give us any sense about some of the opportunities people have been talking about with the TA 5000 in Tier 1 accounts? Are these situations where it's a year, a year and a half, two years for rev rec? Are these more hunting license situations? Can you walk us through kind of the scenarios for operationalizing those accounts and getting revenue?

I would say our activity in Tier 1s today, which there's a lot being written about it and we're trying to do our best to stay out of the fray because customers don't like that. Our activity in Tier 1s, first of all, is not hunting license and I would say that's in all of the Tier 1s that we're actively engaged in -- which we are actively engaged in all the Tier 1s. It's not hunting license. The intent would be for us to be approved in particular applications and handle the requirements associated with those applications. The applications, as I'd talked about with John Anthony's question, they're fairly broad. We have some that have legacy infrastructures in place, that they want to move forward with something different. We have carriers that are very interested in rolling out fiber to the node type applications and the 5000 as well as the 5000 in combination with our 1100 series of products including the 1100F make an awful lot of sense. We have some that have decided to really pull the trigger on enhancing their metro Ethernet play and delivering a much broader Ethernet over copper type solution. And then we have some as I mentioned before that are looking at costs and operational savings. But in all of those cases, I wouldn't view as hunting license. Now as far as timing, George, you know how difficult that is. I would think we could probably see something towards the tail end of this year. I would be very surprised, though. I think regardless of what plans are that these things and complicated rollouts like these tend to move out. So I would expect it to be a 2008 event with those particular type of customers. Now we have a significant number of Tier 2 and Tier 3s that are also interested and are also moving forward that I would hope to see nearer term revenue from.

Got it. And just as a quick follow-up, 10% customers, any details there?

Sure, George. 10% customers for the first quarter. AT&T -- would now include Bell South -- was at 29% of total revenue. And to break out BellSouth separately, BellSouth was at 4% for the first quarter as a part of the 29%. Verizon came in at 12%, and Embark came in at 11%. And those were all the 10% customers.

Let me just add my condolences about Mark, as well. Thanks very much.

Our next question comes from of Ehud Gelblum of JP Morgan.

Hi, thank you very much. A couple questions, if I could. First of all, Jim, the gross margin was nice and robust. You said it had to do with less volume and product mix. Do you expect it as you look forward -- as the growth products continue to grow, do you expect this to be the new baseline for your gross margin? And therefore we could probably see it break into the 60s as the growth drivers Broadband Access et cetera continue to grow? And secondly, on taxes, when I do the two adjustments you mentioned -- one is the life insurance policy and the other is a tax benefit. I get a tax rate of a little over 36%. Just wondering if that's a new level that we should be looking at going forward or not.

I'll hit the tax rate first. Actually, if you add back the 839 or $839,000, we're closer to 39.4%. That's a tax provision rate that we're anticipating for the second quarter, again 34.9%. As far as gross margins, we do believe that gross margins will be in the high 50s. Whether or not they go up to 60 or beyond really is going to be based on product mix in a particular quarter we think. So our guidance for lack of a better term really still is in the high 50s in terms of gross margin.

Okay. A couple other quick follow-ups if I could. One is your R&D. It sounds like a lot of uptick in R&D is the following customers into new areas, typically probably for the TA 5000 and perhaps some customization features on that. Should we expect that to ramp as volume grows and as your customer base grows with these new products?

I would say ramp would be the wrong word.

Okay.

We typically try to avoid ramps where they won't show dividends. In the 5000, first of all, you're right, is the single largest area where we have increased our R&D expense. And we've increased SG&A a little be able to handle the number of inquiries and the complexity of the inquiries that are coming in. One other impact was we talked over probably on most calls about the fact that we have increased our international as we try to grow international markets and, I think, that there's some reflection of that also. As far as is this a beginning of a ramp, my feeling is no. It's not inconceivable that as we see more and more success with the 5000 that we won't increase R&D in that area. But my feeling is at least for the near term and for the opportunities that we see after today, we're in the ballpark of where we ought to be. I wouldn't characterize it as a ramp. And I think volume, at least revenue increases won't really affect that so much. It'll be whether or not we really go after a lot of different opportunities that are here today. And right now we're able to cover a pretty broad base.

That's very helpful. Two other quick questions if I could. You in the past have not had great visibility in Q4 -- just seasonally, seems to be a tough quarter. With some of the contract wins that you've had and some of the pickups at the new VARs, does it give you any more sense of confidence? Even your guidance of 473 or growth over last year does sort of imply a better fourth quarter than you've had in some time. I'm wondering if you see any type of thing to give you more visibility there?

The truth is we don't have any more visibility in the fourth quarter. In fact, I would say that with the success we're seeing with the 5000 and the potential impact with the 5000, I would say that probably makes it cloudier than more visible. The more products you sell that have implementation cycles, the more difficult it is to figure out where those new products will come in line. Am I more optimistic about this fourth quarter than last fourth quarter? Well, on the fact that the wins that we have already talked about in the optical access periods, the fact that more time has gone by and the fact that we're actually starting to see revenue and that a lot of the operational issues are getting worked out, I would be more optimistic about this fourth quarter than last. But I think the 5000 adds cloudiness as to how much did that add to it or not? So I'd say visibility hasn't really improved more time has passed.

Sounds like volatility around a higher bias number?

This is first quarter. And we don't have a lot of backlog. But would we be more optimistic at this point in time than we were last year? Yes.

Thank you very much.

Your next question comes from Marcus Kupferschmidt of Lehman Brothers.

Hey, good morning, guys.

Good morning, Marcus.

A couple things I want to discuss. First the HDSHL rebound, which was a pretty nice rebound here in 1Q. Do you think that was a function of the broader market or at least somewhat influenced by one customer working through some inventory reuse? Or how should we think about that?

The answer is, if you take a look at the customer breakout. We saw seasonality in some of our customers and then other customers. And there is one large HDSL customer that we talked about having a slow down at the end of the third quarter and fourth quarter that we believed in the fourth quarter that they had -- that the spending environment didn't reflect what we believe the demand in HDSL had to have been. And I think that that probably impacted Q1. And I think that, they're probably now purchasing more at the demand rate than what they were doing before.

Okay. And a situation like this -- do you expect some sort of snapback versus just resumptions in normal levels?

There's no way for us to know. Historically we went through this with Verizon at one time. And what we saw was it came back over a few quarters. But there wasn't a real snapback. So I think we'll just have to see. If they lower their inventory to a level and then figure out how to manage the business at that inventory level, you won't see that snap back.

Okay. And just follow-on discussion of legacy products. When you think about your traditional products, everything excluding optical, Internetworking, and DSLAMs, or broadband, excuse me. Do you think that business could be flat this year or do you expect it to be up or down?

We tried to talk about that being in the flattish environment unless we saw a pick up in the two macro things, which is IT spending, which we would be surprised to see materialize over a short period of time -- that's more of a long-term trend. And the more volatility being around wireless spend. And I still think that that's true. I think if we see an increase in wireless that we'll see the business do better than we expect. And if not, then it would surprise us to see it. For us 2006 was not a great traditional product or wireless spend environment. So I would say flattish to slightly up would still be our mantra there.

Great. And one last clarification, the TA 5000 does some functionality that overlaps with some of your existing products. Do you think TA 5000 wins could in part cannibalize some existing business or should we think it as largely incremental and pure growth?

It could for the applications that we're doing now that I've talked about here. Probably let's say 80% of it is incremental. All of the deals I've talked about here in relation to these different applications are incremental to what the 3000 does. I would view it largely at this point in time as incremental. At some point in time you may see us trying to drive the 5000 into really just a traditional ATM DSLAM type of application, but that's not what the majority of activity is around today.

Does it cannibalize some HDSL?

I don't know. Over the long-term, it really depends on what they do tariffing-wise with things like Ethernet over copper. As the world moves over the long-term to a pure Ethernet core, I think the answer to that is yes. I think that over time that Ethernet will become -- let's call it negative Ethernet -- will become the mainstay in the way that business networks are deployed, but I think that's a long period of time.

Great. Thanks so much for the info.

Your next question comes from of Vivek Arya of Merrill Lynch.

Thank you. Good morning, Tom and Jim. My question is -- when I look at your traditional versus new growth areas, I think you mentioned for your traditional areas you see flattish trends. And my question has to do with your new areas or the way you define new areas, which is Broadband, Optical and Internetworking. When I look at Q1 '07 over Q1 '06, there wasn't any growth in these new areas. My question is, if legacy is going to be flattish this year, what kind of growth trends do you see in the new areas?

Well, that's the most difficult. Let me characterize our visibility in our legacy businesses as being that of two weeks of backlog. If the environment that we saw in Q1 is indicative of our legacy environments then everything changes. Having said that, the real question is what kind of growth can we get out of really what we're counting on being the growth drivers this year. And over this year period of time, it is difficult to say because of where we are with the different product launches and introductions. Do we think that these potential areas could significantly impact over the long period of time? The answer is yes. Do we think that the products that we have in test right now or have developed in the recent history could double the size of the company? The answer is yes. Our problem has been trying to deliver to you exactly what quarter that will happen in. That's still the difficult thing for us to do, we don't know.

If I look at last year as an example, Tom. The traditional areas were down 15% year on year for all of your 2006. And new areas were up 11%.

Right.

Is that a characteristic growth trajectory for this year? Is it more traditional flattish and new areas still see mid double digit kind of growth?

Let's break that down just a little bit more. I think NetVanta or Internetworking products with our IT Gateways and NetVanta will continue to gain momentum and I would expect those to continue to grow at a very strong rate. My belief is that NetVanta in general has bring more and more VARs in. And as more and more VARs are comfortable with the NetVanta product line, that will momentum. That will actually increase the slope of that growth. I think that we're seeing some of the early benefits of that now. With Optical Access, we have won an awful lot of business that is just at the very early stages of delivery. I would expect Optical Access to have very strong legs. The question on DSLAMs, we've been successful with DSLAMs. I think that the appetite for DSLAMs hasn't gone away. I think the 5000 deployment -- as people get themselves more and more positioned for things like FDTN and whether or not they deploy triple play services, but delivering higher bandwidth will add fuel to that. And I would expect that slope to actually improve over time. I think we would see acceleration in those three product areas. I just can't tell you what quarter that acceleration will hit any type of inflection point.

Got it. And just one last question if I could. Non-GAAP, Jim, could you also give us some non-GAAP information for the quarter just so that we can do an apples-to-apples with previous quarters so non-GAAP cost of goods and R&D and SG&A expenses?

Sure, Vivek, I can give you the details for those three line items on the P&L in regards to 123(R) impact or the expensing of stock options. So cost of sales for the quarter was $93,000. Selling, general, and administrative expense in regards to 123(R) was $1.079 million. And research and development in regards to 123(R) was $1.067 million.

Great. Thank you.

Thank you.

Your next question comes from Jason Ader of Thomas Weisel.

Thanks. First of all, just a heads up, there's nothing on the website yet on the investor relations section of the product breakdown.

We'll check that, Jason. It should be, but I'll check that and make sure.

Secondly, on the comments that you made up front on less than normal or better seasonality than you expected in some of the categories. I think you mentioned HDSL as one, I think you mentioned optical access as another, or maybe broadband access. But in light of what you talked about with some of your big customers like AT&T and Embark in Q4 having budget weakness -- is that a fair statement if you look at it in that context?

You're bringing up a good point, which is how much of Q4 was understated because we had a slowing environment in Q4. And you're right. To be honest with you, I don't know how to put a number on that, but the people on this call ought to think that too. Q4 was not a great quarter for those two customers. You're absolutely right. I don't know how to put a number on that, Jason.

But it's fair to say that those customers at this point are back to normal is the right way to put it, but certainly --

I'd say in some areas they were -- the other thing to keep in mind, which may -- if you look at the product breakouts, if you take a look at HDSL and this is the one that's a little -- the one that jumps out at you probably the most. If you look at the Q1 '06 versus Q1 '07, you really saw even a stronger rebound. And I don't believe that that spending environment was in existence in Q1 of '06. So there are a couple of ways that you need to look at that to come up with your conclusions on that.

Okay. That makes sense. And then for the TA 5000, do you have actual revenues coming from that yet? And if you do, what percentage at this point? What ballpark percentage are you getting from that product?

I'd say we do have revenues, I'd say right now they're insignificant.

Okay. So the optimism on the TA 5000 is based on RFP activity, trialing, customer feedback, competitive --

It's deals that we have secured that have not shipped yet. And some of these deals have firm timelines. We have deals with larger carriers that are secure that we have not shipped yet that the timelines are, I would say softer because of the type of customer. But that the optimism builds basically around the activity that we've seen. It's not a significant piece of revenue in Q1.

Is it fair to characterize from your comments, Tom, it seemed to me that you have a little bit more visibility at this point on the optical access ramp with Tier 1 than you do on the Broadband Access side. In other words --

On 5000 versus the Optical Access? On the 5000 it's just because it's -- we're earlier now. I would say that the success we've seen in the 5000 this early on in the launch is surprising to us for any product. The momentum and the acceptance seems to be growing faster than any product that I can recall us delivering. So it's a real positive thing. The visibility on the optical assets products should be better because now we've actually turned the corner on getting that revenue starting to flow. And that's always a kind of a milestone on being able to ramp.

So if we look back at '06 and why there was sort of some difficulties on the new product side -- is the best way to characterize it just the stage of product development that you were in last year? In other words, you had a couple of key products that were just not quite ready yet in terms of feature set or customer deployments or whatever?

Yeah, if you let me lump in there, which where I think the biggest obstacle in '06 was really operationalizing, really getting them implemented into the carriers' OS system. And then finding out the product tweaks that we need, sometimes at the last moment, but the product tweaks that we would need on the particular carrier. I would say that was the biggest thing. And some of that had to do with once you figure out that they want something different, you have to go and build it. That's the way I would characterize '06. I don't think it was a significant delay in a major launch, it was more getting the work done.

Okay. Great. Thank you, guys.

Your next question comes from Nikos Theodosopoulos of UBS.

Thanks. I had a couple of questions. I guess, Tom, now that Q1 is behind the company and the commentary on the call and the momentum in the TA product approvals and so forth. Last call you mentioned that there were several factors that would determine whether or not you'd be able to grow top line double digit in '07. Given this quarter's behind you and everything you said on the call, is that a milestone now that you think is a reasonable target for the company to achieve at 10% or greater growth? Is it still too early in the year to hang your hat on that?

I have a hard time hanging my head on anything that's three quarters out. And I don't know if I would hang my hat on -- is it a reasonable target with the momentum that we have, and the fact that we're starting to turn on some of these revenue streams, I think it is a reasonable target. But there are just potential things that could slow us down. That assumes that there's no significant shift in our legacy business, which I really don't see happening.

Okay. And the second question, if I look at the business model -- in the last couple of quarters, GAAP operating margin was about 19%. Non-GAAP a couple of points higher than that. Assuming you can grow revenue 10% or plus this year, it's obviously going to require sequential increases throughout the year. What's the plan for operating expenses and operating margin? Will the company continue to invest and keep margins flat? Are you planning to get back to like the 25% kind of GAAP operating margin that you hit in the third quarter of '06? How do you plan on managing the business model as revenues ramp this year?

Right now, our best guess is that we should be able to get back to that 25% operating model. I'll tell you that things can change. So give me a little bit of relief on that, but I don't see a reason for us to have to significantly change what we're doing now. I think that we've increased R&D expenses to a point now to where we're in a comfortable range. We may have to do a little bit here and there, but I wouldn't expect keeping us from being able to get to that model once the revenue starts coming in at that level.

Okay. And just a quick clarification question. Even though the Total Access 5000 revenues are small now, are they included in your DSL revenue breakout? Are they not part of any these new product categories that you give?

They're in Broadband Access.

Okay. Great. Thank you.

Okay.

Your next question comes from Simon Leopold of Morgan Keegan.

Thank you. Also wanted to extend my condolences for Mark's passing, as well. In terms of some of the topics, I was hoping you could talk about some of the milestones around your Optical and the TA 5000 products for those Tier 1 customers, specifically what kind of work do you have left to do in terms of OSMINE or the GFDS type work with Telcordia? And what kind of timelines do we have for those projects? And also, in terms of the feature sets, I know that when we've seen the TA 5000, some of the trade shows -- it sounded like a lot of the new features that were driving these opportunities were as yet to be released. If you could give us an update on where the product features are -- what's generally available and what's in the pipeline? Thanks.

Okay. I'm going to be -- I don't know if there are any competitors on the call, but as far as specific feature releases and when they come out, I'll probably not answer to which you'd like me to. Let me start with the optical access pieces. To my knowledge, we are done with the Telcordia and the GFDS work that I'm aware of with the 6100. So I think at this point in time, it's building sales momentum. There are still applications I had mentioned. An example of that is we'd want an additional application for cell site coverage in one of the Tier 1 carriers. There's still applications that have to be rolled out like that, but I'm not aware of any Telcordia work that we haven't finished. There may be but I'm just not aware of anything significant. On the 5000, you're right. There's a lot of development activity going on. There's a lot of specialization that was going on for some of these larger opportunities. And there are features that will be released throughout this year. And some of those features come as early as this month, some of them come again in June and then we have future releases depending on the particular opportunities. There's still a lot of work that has to be done. Our customer base is fully aware of where we are with this. We are working with our major customers pretty much in lockstep on what it is they need and when they need it, but that will be coming throughout the year.

And just following up on the kind of interoperability work and testing that your customers are doing, is that still underway? And part of the reason why we've only seen modest revenue on some of these as a gating function?

I guess you're talking about the 6100.

Yep.

There's interoperability work, and you're probably aware of some specific interoperability work that's going on. There's interoperability work that continues to go on at all these carriers and what they'll do is maybe open up a pocket in one place or another. I'm not aware of anything specific on interoperability that's slowing us down, but there's a sign there may be some, I'm just not aware. On the larger opportunities, I think we've gotten all of our interoperability pieces put to bed, but that doesn't mean some of them didn't crop up last week or something.

Just to close out the line of questioning. Really why I'm asking is you talked about your feeling that these opportunities for the incremental business was at best year-end and really an '08 story. I think that this is the topic that's the driving factors. Is that a reasonable assumption?

I would say that's true on the 5000. To the extent I try to believe that over on the 6100, I apologize. I do think we'll win opportunities this year with the 6100 that will take until next year to deliver. But I'm more optimistic about the things we have already put to bed on a contract perspective on delivering this year. I think those are two different things.

Thank you very much.

Your next question comes from Cobb Sadler of Deutsche Banc.

Thanks a lot, guys. I may have missed this, but you talked about directional guidance for the June quarter. And just looking back, that has been anywhere between 5 to 6 % or 12 to 13% sequentially. So when you talk about typical strength, what do you mean there?

I think we're looking at the last two years, really.

Okay.

So the last two years will be more reflective of 12 to 13.

Great. And on the Optical Access business, can you talk about of the business that you did in the quarter, what size carriers were those? Were they primarily Tier 2, Tier 3s? And then the application too -- is it an OC3, OC12 or 48? And is it wireless or wireline? Thanks.

The ones we're talking about when we saw that pickup were Tier 1s where we had no business basically before, and that's a mixture of different products. And I don't know the exact products, to be honest with you. And then we did see an increase, though, in some of our Tier 2s. And we did start shipping OC48 I think at the end of last year. And I don't have that number in front of me, but I'd be surprised if that didn't continue to increase through the quarter also.

And is the 48 a large portion of the overall mix? Or is it still pretty small and growing?

I doubt it. I would say it's probably still pretty small and growing.

And on the OC3. The wireless or wireline, how much wireless business are you doing within the 6100 product line?

That comes and goes. As to the majority -- you've got to understand our vernacular there. When I say wireless -- a lot of the approvals that we had last year were centered around wireless upgrades or wireless increasing capacity to wireless sites. That actually ships to a wireline carrier though. And the exact mix as to what it is, my guess would be wireless was a significant piece. But I don't know. I don't know exactly how much that would be. I would say that of the Tier 1 carrier, we'll start it at nothing, start moving up, I would say a large percentage of that was probably for wireless carriers.

Okay. Great. Thanks a lot, congrats on a good quarter and I'm very sorry about Mark, also. Thank you.

Thank you.

Your next question comes from Andy Schopick of Nutmeg Securities.

Thank you and good morning. I have a question I'd like to ask on the domestic side and on the international side separately, Tom, to you. First, on the domestic side, recently the Federal Government through the GSA has selected several competitors, including AT&T and Verizon, as part of a multibillion dollar decade long upgrade program, which I believe they've called Networx Universal. I know there's a second award that's coming sometime, I believe in May, called Networx Enterprise. To what extent does ADTRAN anticipate or positioning itself to participate in this whole upgrade and overhaul of these Federal Government agency telecom infrastructure?

Well, our job is -- typically what's happened in these unless there's some specific requirement for almost a mandated products -- typically what we've seen is that they will move forward with selected products and then manage the networks under the umbrella that they have to manage their entire network. We have talked about the potential impact of these and whether or not we can strengthen our position there. We haven't seen anything specific from the customer base that would drive us to different product deployment activities than we're doing today, to be honest with you.

Okay.

Now, I was not aware of the enterprise pieces. That's something I'll get up to speed on myself.

Supposedly it's going to be in May. Also on the international side, over the years, the international penetration that this company's achieved has really been very low. It's always been in the single digit percentage range except in 2005 when I think Telstra had some greater activity. What sales and marketing strategies are you trying to put into place to affect a much greater international market penetration than what you have historically achieved?

We have several initiatives that we started last year. One is we did begin trying to establish an enterprise distribution base for some of our products. We have some in Europe today. We actually have some in Asian territories. And as we complete product developments that are -- I would say slight customized, they have to have the right language support and things. We'll continue to roll those products into what will be a long-term growth potential. The other is I think we kind of regrouped our selling effort and have focused areas where we are trying to leverage our carrier experience. We saw quite a bit of success in Canada last year from a very low base number. That we are hopeful will continue on this year. We have also refocused some of our effort in Latin America countries, as well as making sure that Telstra is taken care of in the Australian region. The final piece is we have increased some of our sales, I wouldn't call them meaningful today, I think they have the potential to be meaningful at some point in the future into China where we have seen some early success with some of our RPR products.

So it's a broader initiative, but I will tell you it's a more focused initiative. There are more regions, but there's focused activity in each of those regions with specific customers. And we've increased our spend in that area. We're trying to do it within the structure of the operating model we have, been able to move dollars into that area. I think it'll pay long-term dividends. I'd say we're in a different position today with our 1100 products and our 5000 products and that we probably have more customer pull than vendor push than we've ever had in this international arena. We're serious about growing it. I won't try to give you a specific time. You're right, historically haven't been good in this area, but we brought in a new management team in that area and we've changed a lot of ways we're doing business.

Well, it certainly seems to me that you will need to achieve much greater success internationally to really effect the kind of growth objectives I think you have longer term.

I would agree with that. I won't disagree with that. We may not have the perfect recipe today, but I tell you we are focused enough on it to where, as things work and don't work, we are moving forward that do work. We'll ultimately be successful. I just can't tell you today that the plan we have today happens to be the perfect plan.

Okay. I have one question for Jim. Jim, I'd like you to repeat the numbers for the fourth quarter of '06 for carrier network division and enterprise networks. I'm trying to add up to $109.9 internal revenue and I thought I heard you say $79.3 for carrier and $39.8 for enterprise for the fourth quarter.

I believe that's what I said. Andy, I'll tell you what, let me call you later, okay?

Fine. It's a little more than just a simple rounding error.

Okay.

Thank you.

Okay, Lynn, I think that was our last call. So thank you very much for joining us on the call today. And we look forward to talking to you in 3 months.

Thank you. This concludes ADTRAN's first quarter 2007 earnings release conference call. You may now disconnect.