ADTRAN Holdings Inc (ADTN) 2007 Q4 法說會逐字稿

Good morning. My name is Sharise, and I will be your conference operator today. At this time I would like to welcome everyone to the ADTRAN fourth quarter 2007 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS)

During the course of the conference call, ADTRAN representatives expect to make forward-looking statements which reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties including the successful development and market acceptance of new products, the degree of competition in the market for such products, the product and channel mix, component costs, manufacturing, efficiencies, and other risks detailed in our annual report on form 10-K for the year ending December 31, 2006, and form 10-Q for the quarter ended September 30th, 2007. These risks and uncertainties can cause actual results to differ materially from those in the forward-looking statements which may be made during the call.

I will now like to turn the call over to Mr. Tom Stanton, the CEO of ADTRAN.

Thank you. Good morning. Thank you for joining us on such a busy morning for our fourth quarter 2007 conference call. With me this morning is Jim Matthews, our Senior Vice-President and Chief Financial Officer.

Although I would characterize the environment in the U.S. as challenging, during the fourth quarter our growth businesses, including broadband access, Optical Access and internetworking, saw a strong 56% year-over-year revenue increase, and combined represented a record 44% of our total revenue. As most of you are aware, our broadband access products gained traction in all of our key account areas during 2007, with all eight of the top wireline carriers in the U.S. selecting our Total Access 5000 multi-service access and aggregation platform. In the fourth quarter, we began shipping this new platform to our first tier one carrier account. These shipments were tied to Ethernet over copper, which is one of two applications we have now been awarded within this account. This ability of the Total Access 5000 to address multiple applications is showing success with many of our larger accounts. The Total Access 5000 has also been selected by all the major tier two carriers for various applications, many of these carriers receiving initial shipments in the second half of 2007.

In the fourth quarter, our broadband access business continued to migrate to Fiber to the Node applications in the move to upgrade bandwidth. The most significant contributor to our record broadband access revenues was our 1100 Series of Fiber to the Node products. This line of products showed significant growth, both internationally and domestically, as we brought on a new international tier one carrier in Latin America, and as we saw the impact of bandwidth upgrades continue domestically. We believe this upgrade cycle will continue to provide a positive impact as we move forward this year. There continues to be an increasing level of activity, both domestically and internationally, with our 1100 Series of Fiber to the Node products, our Total Access 5000 products, and our various Ethernet in the First Mile products. This activity continues to give us confidence in capturing new customer opportunities, and achieving long-term growth in our broadband access business. Although we are very pleased with the number of awards to date in our broadband access product family, we should remind you that carriers require significant time to operationalize complex products like the Total Access 5000 and 1100 Series platforms, and the timing of these opportunities can vary significantly from anticipated dates.

Moving on to internetworking, although sequentially flat, this category was able to overcome the typical seasonality we see in our business, and saw 30% year-over-year growth in the fourth quarter and a very strong 48% growth rate for the total year 2007. This growth is a result of traction in our NetVanta Multiservice Access Routers, switches, IP telephony products, and our IP business gateways, all targeted toward small and medium-sized businesses. This strong revenue growth is reflective of the broad-based support we are seeing as we work to leverage our carrier distribution channels and our growing [broad] dealer base. The support we are seeing confirms that our SMB solutions are meeting the needs of businesses that require integrated solutions for voice, data and internet connectivity.

During 2007, we continue to expand further in our Optical Access category by advancing our positions across all carrier segments. On both the year-over-year and sequential basis, revenues for our OPTI product line for the fourth quarter increased to all tier one carriers. Although this increase was offset by seasonality that we typically see, we experienced a year-over-year growth rate of 22% for the quarter in our Optical Access category, as we were able to expand applications and gain market share in our existing and new customers. Also of note, in the fourth quarter we received final approvals for phase two deployments at a large tier one carrier. We expect shipments of phase two to begin ramping in the first quarter.

Moving forward, we continue to operationalize new applications and continue to be very optimistic about the growth potential of this category. For the year 2007, our HDSL revenues were flat. We are well along the path of transitioning our company to a global systems-level provider of IP-centric solutions for both copper and fiber. This achievement makes us very excited about the future. We believe our growth businesses will continue to see strength, based on market share gains related to both current and future product introductions, and customer spending trends. Our traditional businesses will continue to track on a macro level with enterprise demand, wireless network expansions, wireline capacity upgrades, and general economic conditions.

I would like Jim Matthews to review our results for fourth quarter 2007 and comments on the first quarter of 2008. We will then open the conference call up for questions.

Thank you, Tom, and good morning to everyone.

Revenue for the fourth quarter was $119 million, compared to $109.1 million in Q4 of '06, and $123.8 million in Q3 of '07. Broadband access product revenues for Q4 of '07 increased 98% to a record $27.3 million, compared to $13.8 million in Q4 of '06, and increased 50% compared to $18.2 million in Q3 of '07. Comparing Q4 of '07 to Q4 of '06, the significant increase in broadband access product revenues is primarily attributable to the effect of market share gains at a tier one Latin America carrier, continuing bandwidth upgrades domestically, and shipments of TA 5000 products. Comparing Q4 of '07 to Q3 of '07, the significant increase in broadband access product revenues is primarily attributable to the effect of market share gains at one large Latin American carrier, and shipments TA 5000 products.

Optical Access revenues were $10.8 million for the fourth quarter of '07, compared to $8.9 million in Q4 of '06, and $13.9 million in Q3 of '07. Comparing Q4 of '07 to Q4 of '06, the increase in Optical Access revenues was the result of market share gains across numerous accounts. Comparing Q4 of '07 to to Q3 of '07, the decrease in Optical Access revenues was primarily attributable to seasonality at tier two and tier three carriers, partially offset by increased shipments to tier one carriers. Internetworking product revenues increased 31% to $14.2 million in the fourth quarter of '07, compared to $10.9 million in Q4 of '06. Internetworking products continue to experience increasing momentum, as a result of our continuing efforts to improve traditional enterprise channel focus, and leverage carrier distribution.

For the total company, loop access revenues were $46.1 million for the fourth quarter of '07, compared to $51.8 million for Q4 of '06, and $56.3 million in Q3 of '07. Comparing Q4 of '07 to Q4 of '06 and Q3 of '07, the decrease in loop access product revenues was primarily attributable to a decrease HDSL revenues. For the total year 2007, HDSL revenues were flat compared to the prior year. Carrier systems revenues were $49.1 million for Q4 of '07, compared to $34.8 million for Q4 of '06 and $44.6 million for Q3 of '07. Comparing Q4 of '07 to Q4 of '06, the increase in carrier systems revenues was primarily attributable to revenue increases in broadband access and Optical Access product categories. Comparing Q4 of '07 to Q3 of '07, the increase in carrier systems revenues was primarily attributable to an increase in broadband access revenues, partially offset by a decline in Optical Access revenues.

Business networking revenues for Q4 of '07 were $23.7 million, compared to $22.5 million in Q4 of '06 and $23 million for Q3 of '07. Comparing Q4 of '07 to Q4 of '06, the increase in business networking revenues was primarily attributable to a significant increase in internetworking product revenues, partially offset by a decline in traditional IAD product revenues. Comparing Q4 of '07 to Q3 of '07, the increase in business networking revenues was primarily attributable to an increase in enterprise T1 and traditional IAD product revenues. HDSL product revenues were $36.3 million in Q4 of '07, compared to $42.8 million in Q4 of '06 and $47.2 million in Q3 of '07. Comparing Q4 of '07 to the same period the prior year, the decline in HDSl revenues was primarily the result of an overall decrease in spending levels at a tier one carrier customer. Comparing Q4 of '07 to Q3 of '07, the decline in HDSL product revenues was attributable to normal seasonality and a decrease in spending levels at a tier one carrier customer. For the total year 2007, HDSL revenues were flat compared to the prior year. As a result of the above, carrier network division revenues were $87.2 million, and enterprise network division revenues were $31.8 million for Q4 of '07.

International revenue was $15.7 million for the fourth quarter of 2007, compared to $10.5 million in Q4 of '06 and $7.8 million in Q3 of '07. Gross margin was 58.4% of revenue for the fourth quarter of 2007, compared to 58.1% for the fourth quarter of 2006 and 59.9% for the third quarter of 2007. Comparing Q4 '07 to Q4 '06, the increase in gross margin percentage was primarily attributable to a more favorable product mix. The sequential decrease in gross margin percentage was primarily attributable to expediting costs associated with the rapid increase in shipments to one carrier.

Research and development expenses were $18.7 million in Q4 of '07, compared to $17.1 million in Q4 of '06 and $18.7 million in Q3 of '07. Comparing Q4 of '07 to Q4 of '06, the increasing in research and development expenses was primarily attributable to an increase in activities related to specific - customer specific development efforts. Selling, general and administrative expenses were $25.4 million for Q4 of '07, compared to $25.7 million in Q4 of '06 and $25.3 million in Q3 of '07.

Stock-based compensation expense net of tax was $1.1 million in the fourth quarter of 2007, compared to $1.8 million in the fourth quarter of '06 and $1.9 million in the third quarter of '07. This reduction in stock-based compensation expense reflects the impact of actual forfeitures experienced on stock-option grants whose vesting period matured during the fourth quarter of 2007. Other income net of interest expense was $2.2 million in Q4 of '07, compared to $2.9 million in Q4 of '06 and $2.6 million in Q3 of '06. The company's income tax provision rate was 34.4% for the fourth quarter of '07, compared to 27.5% for the fourth quarter of '06 and 34.4% for the third quarter of '07. The lower tax provision rate for the fourth quarter of '06 was primarily attributable to the effect of the total year 2006 R&D tax credit being received in that quarter. Earning per share assuming dilution for Q4 of '07 were $0.27, compared to $0.24 for Q4 of '06 and $0.31 for Q3 of '06.

Inventories were $48.5 million at quarter end. Net trade accounts receivable were $70.7 million at quarter end, resulting in DSOs of 55 days for the fourth quarter compared to 49 days for the fourth quarter of '06 and 51 days for the third quarter of '07. Net cash provided by operating activities came in at approximately $19.3 million for the fourth quarter, and $88.8 million for the total year 2007. Unrestricted cash and marketable securities totalled $215 million at year end, after paying $6 million in dividends for the fourth quarter, and after repurchasing 1.87 million shares of common stock for $42 million during the quarter.

Now, as you are aware, ADTRAN has traditionally seen sequential revenue decreases from the fourth quarter to the first quarter, although we believe that new product revenues may potentially offset this seasonal decline, and that we will see year-over-year growth in the first quarter, given the current spending environment we believe that it is likely that revenues for the first quarter will be sequentially down. We also believe we will execute to our historic operating model at the achieved revenue level in the first quarter. Things that may potentially impact results for the first quarter of this year would be the following. Continued stability of our traditional product revenues, spending levels at our largest tier one carrier customer and at second tier carriers, revenue traction at new international customers, the adoption rate of the OPTI 6100 with tier one carriers, the adoption rate of our Total Access 5000 plot form, continued growth in internetworking revenues, and general economic conditions domestically.

Tom, back to you.

Thank you, Jim. Sharise, I think we are ready to open up for questions.

Thank you.

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Your first question comes from Vivek Arya with Merrill Lynch.

Good morning. Tom, I know you are not providing items for 2008, but how should we start looking at it, given the moving pieces you have in your traditional business segment which are slightly, I think, down this year, and then some of the newer business segments where I think you are seeing very good traction but sales are some what lumpy? Can we expect that trend to grow, you know high-single digits, perhaps double digits in 2008?

I think that the - in a normal environment, I would say - you know, I would have a lot of confidence in that type of growth. I would say even in the environment we are in today, I guess the real key to that is what is the underlying economy doing, and how may that affect our traditional product lines. I have no doubt that our new product lines, our Optical Access product lines, Total Access 5000, the things we are doing with our 1100 Series Fiber to the Node, and internetworking are all positive contributors, and should see fairly good growth in 2008. I guess the real key is that underlying piece. We are not expecting at this point in time a significant downturn in that traditional business. HDSL was flat in 2007 to 2006, and we stated again and again we think that, you know, new technologies really aren't impacting that business as much as just the economic environment. So, you know, I will have to leave it to you to come up with your number, but I think you know the deals that we have secured, you know, the products that we are starting to ship now pretty much across all of our fronts. We are confident to see growth in 2008.

I see. I think, Jim, you mentioned that in Q1 you expect to return to a normal operating model. Can you please refresh us with what this normal operating model looks like, you know, gross margin-wise, operating margin-wise?

Well, you know, we do anticipate gross margins to continue to be in the high 50s; gross margins will vary quarter to quarter, as we've seen in the fourth quarter. In terms of OPEX, again two historic trends. Typically as we go through a year, 2008, we do anticipate revenues increasing sequentially, with the possible exception of the fourth quarter, which we typically see seasonality on, and as those revenues decrease we expect our SG&A to converge on the high teens and our R&D to converge on the low teens. So again, that's fairly consistent with our operating model that we've seen in the past.

Okay. Thank you.

Okay.

Thank you. Your next question comes from Brian Coyne with FBR Capital Markets.

Good morning. Is there any way to clarify your outlook a little bit? Maybe I missed it. If you can just confirm if you said you should be seeing year-over-year growth but, just given the spending environment, you might be down sequentially, if that's what I am hearing. If you could just talk about sort of where you are seeing the biggest impacts, it sounds like tier one and tier two, but is this sort of focused around your biggest tier one customers?

The slowness that we have seen in the - pretty much through this year, actually, has been in our larger tier one customers, and specifically a large tier one customer. And you know, the tier twos, we have seen some, we had one tier two that was kind of sluggish, but I would say in general the environment just hasn't been that strong.

All right. And then, you know, you talked I guess a little about the broadband side. If you just talk about the market share at your biggest customer, and sort of what you're seeing there, how is that trend going?

Broadband has been, you know - the new product category in general I would say have been the bright spots; broadband, we have seen traction pretty much across all customer segments. The tier twos have picked up. We have a tier one who has significantly increased their deployment, and then we have some international carriers, and specifically the one in Latin America that has substantially increased, and we see that continuing to move forward into 2008.

And, as you said, with significant growth of your biggest customer, it sounds like at least not seeing much in terms of competitive erosion there. I guess finally, in terms of Latin America, as you mentioned, how much, do you sense how much that did factor into the quarter? Was that pretty much all of the growth in the international revenues that we saw? And then sort of what is the time - I know you announced it last quarter and began shipping in the fourth quarter, but what's the time horizon for that roll out?

That wasn't all the growth we saw in international. And the project on the particular carrier in Latin America is a multi-quarter, multi-year project, so it's something that we hope we will continue for some period of time.

Great. And then, finally, I apologize if I missed this before, did you talk about the tax rate for the full year or just sort of what your outlook would be?

No, we did not. But, you know, the tax rate would typically move around from quarter to quarter. Do remember that the R&D tax credit for 2008 has not been approved yet, it has not been passed yet, so we can expect the rate to go up just a little bit in the first quarter because of that, until it's approved.

Great. That's all I have. Thank you very much.

Thank you.

Thank you. Your next question comes from John Anthony with Cowen and Company.

Good morning, guys. A couple of questions. I apologize if you covered any of this. Tom, the comments you made on HDSL, it sounds like you are fairly optimistic for this year. I don't want to put words in your mouth, so just kind of asking it again, flat '07 versus '06 but definitely a downward trend over the last several quarters, given the visibility is limited, do you have any sense whatsoever of what the plans are going to be like for some of these folks to spend on HDSL? Do you think there is any risk of substitution of 5000 at the expense of HDSL, and is that necessarily a bad thing or a good thing maybe?

Well, as that - as a substitution happens, we would consider that a good thing because of the differences in the ASPs of those products being substantial, you know, the 5000 being higher. As far as significant impact in 2008, our view is - first of all, there is really one large carrier at this point in time that is - let's just say they're ahead of the pack. They're ahead of the pack to where they actually will roll out services, we believe, in 2008. Our belief at this point in time is that first of all those services will be tiered in multiple different segments, and some of those segments HDSL does not play in. That rollout will be a controlled rollout, and the ability of the total numbers to really impact a very, very large HDSL number is just probably not going to be there. So, we kind of fall back to saying in 2008, we think that the biggest impacts to HDSL will be the economic environment and wireless upgrades. Now, we haven't thought about 2009 yet, but in 2008, we just believe those are going to be the big movers.

Okay, and as a follow-up, going back to I think the first question that was asked, if we are to assume arbitrarily that HDSL is flat to down, would it still be possible for ADTRAN's total topline to grow this year, in your opinion?

Absolutely.

Okay.

Absolutely.

Is that driven largely by the 5000 or is it just across the board?

Well, I think Optical should be stronger, internetworking should be stronger, the 5000 of course will be stronger, and we have awards that we won that we - for instance, we started shipping to our first tier one at the tail-end of the fourth quarter, and that is something that ramp. We have other tier one accounts that have not started shipping yet, that will start shipping throughout the year. And Fiber to the Node products, our 1100 Series, we expect to have a good year in 2008. So our belief is, yes.

And lastly, can you just give us an update on the pricing environment. Obviously, your largest competitor is suffering pretty badly right now, and have you seen anything change dramatically one way or other on the pricing environment? Thanks, guys.

No, we haven't. It has been fairly consistent now for the last year and-a-half or two years, and I would call it, you know, as far as telecom equipment goes, from our perspective it has been relatively stable.

Okay.

Thank you. Your next question comes from George Notter with Jefferies.

Hi guys, this is James Kisner calling in for George Notter. Can you hear me?

Yeah, James. Go ahead.

First, I want to talk about the Latin America carrier outlook. How should we think about that business? Is that lumpy business or should we think of it as a book and ship-type business as we roll through quarters? How do we think about that?

You know I hate to say it, because I know people that don't like this word, but I would characterize it at this point in time as lumpy. It is a carrier that is trying to do some aggressive rollouts, I think that they will have to take equipment and get it installed and go through the learning curve of doing that. And it is also a fairly new customer to us, so I think our understanding of their buying habits is very fresh right now. So, that's the way that - until we get kind of more history and more run rate with this customer, I would characterize it as lumpy.

And just a follow-up, you talked about cost of expediting products to a carrier. Was that the Latin American carrier? How much was that cost and will that come out of the P&L in Q1 and going forward?

I will let Jim comment on the actual cost, but the carrier was the Latin American carrier where we saw that impact.

Without those expedited costs, we could have probably broken 59% on the margin line.

Okay. Thank you.

Okay.

Thank you. Your next question comes from Cobb Sadler with Deutsche Bank.

Thanks a lot. A question on the broadband access business. Can you talk about what the rough split is between your traditional products that may be ATM-based, so like the 3000, and maybe traditional ATM based, remote terminal DSLAM, versus the TA 5000, you know, [/1148] apps, the newer-type products? Could you give us a rough breakout there, or are you keeping that quiet?

Well, it is not as easy as maybe we would like it to be. Our 1100 Series products, or Fiber to the Node products, have the capability of operating both in an ATM mode or an Ethernet mode. So it is tough for us to be able to say whether or not they're - whether or not a particular shipment is being operated in one mode or another. I will tell you the 3000 series, which is our traditional older ATM DSLAM, was down. The majority of the - in fact all of the increase that we saw therefore was the Fiber to the Node 1100 Series and then the 5000 Series product.

Okay, great, and the 3000, it is less than half of the broad category of broadband access?

It is significantly less than half.

Okay, great. On the Optical Access, you talked about growing the share, is it mainly wireless back haul or what's the real application there?

Well, actually, in many of the approvals that we are getting now, it is for any application that you would use an Optical Access multiplexer for. I think - we still tend to believe, and I think the carrier customers tend to believe, that potentially the largest piece of that will be for wireless back haul.

Okay. Sounds great. And then last question on the Optical Access, it is primarily OC12, or are you - any OC48 shipments yet? Do you expect those to happen in the year?

We started shipping OC48 in the second half and we expect OC48 shipments to ramp through this year.

Great. Thanks a lot.

Thank you. Your next question comes from Marcus Kupferschmidt from Lehman Brothers.

Hey, good morning guys. My first question is to try to understand the comments about the spending environment, and kind of what you are assuming in the first quarter, you know, you have given us a sense of whether revenues could be kind of a high and low point. But again, what are the product areas where you see the biggest variability in the first quarter, and how much of that is the challenging spending environment versus just operationalizing some new ones?

Well, you know, I think that the environment, the environment we are looking for in the first quarter is not substantially different than the environment we saw in the fourth quarter, or third quarter for that matter. So we are not expecting some big dramatic shift. The thing that could impact that, if you look a year ago, you know, first quarter of 2007, we saw a very, very strong HDSL quarter, especially for - I think it was a record HDSL first quarter. We were not expecting that, you know, in our guidance. That could happen. If that does happen, that will be a great thing. We are expecting continued momentum in our 5000 products and continued momentum in our 1100 Series products, and then carrying on. So it is the growth products that will be driving that. The - you know, one of the unknowns is, does HDSL see that same type of bounce back that we saw in the first quarter, but we are not expecting that at this point.

Just to clarify, when you say momentum, I assume you mean sequential revenue growth, that may mean year-over-year revenue growth, but I assume - your Latin American [one], it's a lumpy deployment, you had a fabulous fourth quarter, so I assume your broadband business should be down a little bit sequentially in 1Q?

We are getting awful granular. When I meant momentum, I really meant more customer traction than necessarily saying sequentially one way or another. I think there's absolutely that capability but I wouldn't get into that kind of -

Okay. Just to clarify, in terms of your comment the T1 business, HDSL, I guess your view is you are shipping a lot less than the current consumption of the carriers, and therefore you are optimistic you get some a snap back and finish, you know, hopefully these guys finish [absorbing] inventories or something?

Let me not, no. I didn't mean to imply that. I guess what I am saying is what we are expecting right now with Q1 is an environment that is very similar to wat we saw in Q4. There is, my only point was that we did see a snap back first quarter of last year, of 2007. We are not expecting that this year. So I don't want to lead you to believe that.

All right. And then anything to just clarify, you are shipping to meet the current demand of the customers? Is there any inventory situation going on?

I will tell you, you have seen the numbers.

Yeah.

AT&T is - has not been the strongest customer by any stretch in 2007. And you know, I think some of it is they have changed the way that they operate. I think they're able to operate today, at least it seems like, with a lower inventory level than they have in the past, but we haven't seen a fundamental shift. If you talk to the customer base out there, they haven't really shifted to a different type of technology. So, you know, really the real answer is I don't know.

Thank you very much.

Thank you. Your next question comes from Ehud Gelblum with JP Morgan.

Hi. Appreciate it. A couple of questions if I could. First of all you mentioned, which I thought was kind of very interesting, that you saw that specifically in internetworking, small to medium businesses were strong for you. Total aside, but just that's one of the areas that most people are most concerned with in the economy. I know you are not totally a read on the economy, but are you continuing to see small and medium businesses continue to be a strong point for you, and I am curious if you see any weakness at all in that customer segment. More closely related to you, FairPoint recently in the lines that they have still not bought from Verizon but could be closing on sometime relatively soon, depending on what the [PCs] do, decided to choose a competitor of yours, Ocom, over your solution, in what to me was sort of a surprise win. I'd like to hear your comments on kind of how that procedure went and why you may have lost that, whether you can maybe get back into that and how much revenue that may have represented for you, and then a follow-up on some other TA 5000 [things].

Okay. On the SMB piece, you are right. I don't think that our enterprise router business at this point in time is necessarily a good gauge for that, that's just because in the relative terms of market share we're still fairly low. It is tough for us to say how much of that is because of a robust or a lackluster SMB environment versus what it is we are doing in our bar channel and our carrier channel. I think the growth that we would see that we had in 2007 was market share gains with whatever market there was, because of our focus on the bar and carrier channels. That has just been very successful in 2007. If that environment hangs in to the same extent it was in 2007 into this year, then we would expect that same type of reaction. I think that the momentum that we have and in our current approach to that market, we are absolutely expecting internetworking to grow this year. Now the environment, who knows where the bott om of the economy may be, and we are expecting, you know, some type of stable environment in that type of scenario.

As far as FairPoint, I hate to comment on specific customer interactions like that. Ocom did win the Verizon piece to that business. Our Total Access 5000 is actually shipping to FairPoint. We are planning on continuing to ship to FairPoint. You know how our reaction is to things like that. We ten to continue to move forward and continue to plug away, and more times than not we end up doing well. So that's pretty much my comment on that.

Okay. Great. And two other things on the 5000, it appear that is the Ethernet aggregation wins that you had seem to be doing well ,or starting. You had some wins, I believe, using it for ATM aggregation and some Fiber to the Node types of applications you were using the 5000 for. Can you give us An update on timing of those?

Yeah. We have, there are some - you know, there are multiple customers that looking at both of those applications. Some will actually start shipping in the first half. As far as the larger tier one carriers, we continue to believe that we will have one of the other tier ones start to ship in the second half, and our hope is to have the other one shipping in the first half. There are three tier ones. We started shipping to one; our hope is to have additional one shipping before the half and then the third one shipping in the second half. That's still our current outlook but I will continue to remind you these are big carriers and sometimes they don't meet their dates. We just have to keep people updated as that shifts.

Post-Christmas, in any contact you've had with them, has anything changed at all from what you thought going into Christmas?

No, but you know, post-Christmas, pre-Christmas, we were continuing to think that we would have one before and one after. There's still a lot of work to be done, though. I will tell you it is a fluid situation with all of these customers, until you get them shipping. So we tend to put a little bit of delay into our forecasting because we know how things work and sometimes they still surprise us. We are still with that mindset.

Great. Thank, Tom.

Okay.

Thank you. Your next question comes from Kenneth Muth with Robert Baird.

Hi. Could you just give an update on your ONT outlook and your developing that and looking at coordinating that with the TA 5000? Any updates there would be helpful.

Yeah. We haven't announced our ONT product yet. I will -- we are, I guess, and I would really hate to, because there are a lot of competitors looking for that. We will have a product this year. We are past the, I guess - let me just leave it at that. We will have a product this year. I think that we will be at a timeframe that will meet the requirements for our customer base.

I guess part of the reason for the question, do you think is there any delay in your customer on behalf of - waiting for that product to be launched in coordination with your TA 5000 deployments?

I tell you, the customers we are working with and have been talking to and - I think that I shall biggest push is making sure that the ONT, and the OLT, the whole TPON solution, is going to be available. We are keeping them up to speed on our what our timeframes are, and I will tell you some of them are actually trialing the product. So I think we are in pretty good lock-step there.

Okay. Thank you.

Your next question comes from Simon Leopold with Morgan Keegan.

I wanted to see if we could get a couple of quick housekeeping items. One, if you could walk through some color on your 10% customers in the quarter?

Sure. Simon, this is Jim. AT&T, including Bell South, came in at 18%, Verizon at 10%, Embark at 12%, and Qwest at 15%.

Great. Thanks. Also he breakdown on stock-based compensation, the split between COGS, SG&A and R&D?

Sure. For the quarter, for Q4, SG&A was $273,000 and R&D was $817,000. We had an adjustment again because of the [inaudible] up in the fourth quarter that I mentioned in my call notes, in the cost of sales of a credit of $15,000. So the net pretax effect was $1,075,000, and the tax [inaudible] up in that regard was 5,000 credit. So the net after tax was $1,070,000. That detail is also in the 8-K that has also been filed early this morning, Simon.

Great. Thanks. And more along the lines of some of the trending, a number of companies have had issues with their cash position and the interest they're earning. If you could talk a little about what you may or may not be doing differently with your cash on the balance sheet, and what kind of interest returns you are getting in this environment?

Sure. We have always maintained a safe position in terms of our cash balances. If it is not in a cash deposit account, we are normally invested in non-taxable immunity of vehicles that are typically in very short-term. We do have a bond portfolio that is immunity-based. Our average rating is a AA plus. The duration on the bond portfolio is 0.47 years, so our maturities are very, very short. So again, that's an example of how we are running a very conservative cash management position.

Is it fair to estimate other income should continue to run in the neighborhood of just being south of $3 million?

Well, it really depends on what interest rates do going through '08, Simon, but I would imagine it would be something at or around what we saw in the fourth quarter. It could potentially go down a little bit, again because of interest rates.

Okay. Just one final one. The international business, nice surprise this quarter, popping up. You did mention you see that as a multi-quarter customer. I would like to hear your thoughts on other international beyond that one Latin American customer you have highlighted today.

Well, we are continuing to push on multiple fronts, Latin America was one of those fronts. We continue to win -we won smaller opportunities in South America. We actually have won some EFM business in Europe, and we are in RFP situations or trial situations in other areas in Europe and outside of Europe. So, the - you know, I am nervous about talking in greater detail. It is just the uncertainty of that customer base, being it is relatively new to us. But I would say from an opportunity perspective, it has never looked brighter for us as far as the interest that we have from that customer base.

Great, and just a quick status on your share buy backs and then I will yield the floor.

Sure, Simon. During the quarter we repurchased, as I said in my notes, 1.871 million shares. We have remaining on the current program 1,532,000 shares.

Great. Thank you.

Okay.

Thank you. Your next question comes from Paul Silverstein with Credit Suisse.

Can you hear me?

Yeah.

Great. First, I want to thank Simon for asking half my questions. TA 5000, can you give us some idea, I know it is early and I know you don't want to get too much granularity, but can you give us some idea where you are in terms of revenue from that platform?

Of course going through the year, it is, you know, if you look at the uptick we saw in the fourth quarter, it was a part of that uptick, but I would say that the biggest part was actually our Fiber to the Node 1100 product.

So the 5000 numbers are still relatively small, Tom?

Yeah, I would say it is relatively small, I would say we're still very early in that cycle.

Okay. Now, and at the risk of pushing it, is it a safe bet that it is less than 10 million?

It is less than 10.

Okay.

And I will tell you, you know, we are - we try to talk to as many people about this as we can. You know, we did start shipping to a tier one in the fourth quarter, and the reason for talking about that wasn't necessarily the volume of that shipment, it was the fact that we had gotten through the integration phase and, you know, have turned that into a real living customer that we think will continue to grow for many years. So, but yeah, I mean it was less than 10 million.

All right. Is there a - I think you might have spoken about this in the past, but is there any benchmark you can offer us in terms of your expectations for the 5000 in '08? Is this a $50 million-plus product or is it too early to expect to reach that type of numbers this year?

You know, the variable there is really the larger carriers and what they do. There are enough opportunities that we have secured, and as I mentioned in my notes we actually are at a point now to where we're securing multiple applications within some of these largest carriers. So initially, for instance, at one carrier we talked about just Ethernet over copper. Now we are talking about two applications with that carrier and that's happened, you know, in several different carriers at this point. So, you know, I think the opportunity is there, but I think the problem with us is timing and trying to figure out when these things will actually get operationalized or not.

Okay. That being said, in terms of the Optical Access, the OPTI product line, throughout much of '07 the story was it was just a matter of time before the various wings you had would kick in. At this point in time, is there any more visibility in terms of thinking about the growth rate for that product line? Is it something we should think about as a 20% year-over-year, is there any benchmark you can offer us there?

You know, the real, the thing that we have been waiting for on OPTI, at least in the second half of the year, I mean we had a strong third quarter, a very strong third quarter in OPTI where a lot of these things gelled, and the big unknown was when do we get phase two at our largest carrier rolling? You know, we are very glad we got that behind us at this point in time. We believe that that's the biggest potential within that carrier, that that significantly opens up the market space. So, we are comfortable in saying that we are going to have some meaningful growth in 2008, but we haven't been able to put a number to it.

But, Tom, that phase two, is that tens of millions of dollars in terms of the opportunity?

You know, over what period of time? Is that tens of millions in a year? You know, that is a, that is a tough thing to say, Paul. I would say yes, the way that we are looking at it and the way we believe that the market potential is for that product, the answer should be yes, but a lot of those things are outside of our control.

All right. And the last two quick ones. Seasonality. I know it's a way off, but you just reported your 4Q. Can you just remind us, historically carriers have blown out their budgets in the fourth quarter. I recognize that things have changed in the recent past, but can you explain why that shouldn't be the case this year? You mentioned your fourth quarter has been down historically; what's the explanation for why we shouldn't see strong 4Q? And then finally on visibility, historically I know it has been book and ship business, you've often commented that you know, it is ten days of visibility. Has that changed?

No. Visibility has not changed. I just looked at this very recently, and our visibility is pretty much where it always is, and the type of customer base that we have pretty much hasn't changed and the buying habits haven't changed. The fourth quarter has - if you look over the history of ADTRAN, there are times where it is flat. Typically, it is down, and the times where we have seen an uptick in the fourth quarter, or sometimes even the flatness in the fourth quarter, is more associated with timing of market share wins or ramp ups in the customer base. So, you know, that's why we kind of just fall back to saying it is seasonally down and then the first quarter is typically seasonally down after that.

Tom, why don't you benefit from carriers blowing out whatever budget they have left? Why shouldn't we see that in the 4Q dollars?

For one, I will tell you one rationale is that we typically haven't gone after that. Now, historically, with our, if you look two or three years back, where substantial majority of revenue was kind of more HDSL and T1 related, we were in a position to the extent that they spent that money in the fourth quarter and the underlying demand didn't change; all we were doing was hurting first quarter or second quarter. So we typically shied away from that type of situation, and we just haven't had a - and maybe the products that we have or, you know, the relationships and the way that we tend to not try to have influxes our cost - of demand because at the end of the day it is the user take that drives demand. We just haven't had people come to our door with big wads of cash saying, "Here, will you take this?"

Thanks a lot. I'll pass it on.

Thank you. Your next question comes from Jason Ader with Thomas Weisel.

Very well pronounced. Thank you. Hi guys, how are you doing?

Good.

A couple of questions. First on the HDSL, I guess I am just struggling with this segment of the business, as I have for a couple of years just trying to figure out where it was going. Yes, it was flat in '07 after being down I think about 6% in '06, which I guess is an improvement. But when I look at the fourth quarter numbers and your commentary on Q1, if we are flat on that line item from Q4 to A1, it will be down 20% year-over-year, just doing the math real quick.

Right.

In the face of a potential recession in the U.S., I mean it just seems like, yeah you probably still be able to grow the overall business, even if HDSL gets hit pretty hard in '08, but it seems like a lot of people seem to be thinking flat - from your commentary, sort of - flat is sort of the way to think about it. I just want to clarify, you know, in term of your model and your outlook for 2008, are you expecting the business to be kind of flat or are you trying to be a little more conservative, just given where we were the last couple of quarters and given the outlook in the U.S.?

Well, I think that's, a key component of this whole discussion, is what is the outlook in the U.S.? Today was a day that's, you know, potentially will have longer-term impacts. We've had some lack of stability, I would say, over the last - actually the last fairly significant period of time. We have - you know, we are not expecting the bottom to fall out at this point in time in our modeling. If there's a significant downturn in the economy, I am not going to sit here and tell you that that won't affect HDSL number and it won't affect other pieces of the business. But at this point in time, we are not smart enough to tell you if we are near the bottom or we will fall substantially lower than where we are today. We are really expecting an environment and saying that we see that business, you know - the right word I think is stable. I won't tell you it won't be down single-digit percentages. I won't tell you it won't be up. I think I'd probably more surprised if it was up, unless we saw an increase in wireless numbers, but we are expecting - in saying that, we are saying that is true if the environment kind of hangs there the way it is, has hung in the last six months or so. Does that help you at all? I am not going to sit here and try to forecast what the U.S. economy is going to do six months from now.

I guess my point was, you know, just looking off of the Q4 number, in Q1 just a flat result would be down 20%, so I mean why shouldn't we be thinking absent any, you know, deterioration in the economy, the HDSL business to be down let's say 10 to 20% in '08?

Because of our, you know, backlog situation, which is relatively non-existent typically in HDSL, I can't tell you that where certainly that it wouldn't be. What we have tried to do and what we encourage people to do when they look at HDSL is look at it over longer periods of time, because quarter-to-quarter deviations in the inventory from a very large customer, right, and we have - our biggest customers for HDSL are the biggest carriers, and they tend to be able to swing that pendulum fairly far. You know, just one customer can swing it, so we tend to look over a longer period of time. So your scenario - I won't tell you that your scenario is unfounded or that it couldn't happen. I will just tell you I think that the likelihood of substantial decreases is probably not as high as a more stable environment.

Okay. I got you. Then Ethernet over copper, is that the same customer where you had the decline in HDSL? I guess, is there any linkage there?

There's no linkage.

But that's the same customer?

It is the same customer but there's no linkage.

Okay. And then, the Ethernet over copper, should we expect a big footprint ramp where you are shipping lots of chassis, and that will drive the revenue there for the next couple of quarters, or I guess is it going to be more dependent on new customer adds on that Ethernet service?

I think there will be - there are footprint pieces that are going out there, but we tend to think about the revenue growth in Ethernet over copper as being dependent on user uptake. I think that's the right way to think about it.

Okay. Great. Thank you, guys.

Thank you.

Thank you. Your next question comes from Scott Coleman with Morgan Stanley.

Thanks. Good morning, guys.

Good morning, Scott.

On the customer side, a couple of follow-up questions. So Verizon was down about 30% sequentially, which seems to be - and I assuming that the big HDSL drop off was actually at AT&T. What specifically happened at Verizon this quarter? It looks like the lowest revenue quarter you've seen from them in quite some time?

Verizon in the third quarter was 14% and yes, it is down to 10% in Q4 as well. The larger part of what they buy from us is HDSL as well.

Okay, so both at AT&T and Verizon, the sequential fall-off was mostly HDSL?

I would say so.

Mostly, but I would say AT&T, except for their new product area, was pretty much down across the board.

Okay. Interesting. So, the 1100 strength was outside of AT&T. So probably, your, you know, Qwest and Embark, and carriers like that?

Qwest has had a very strong year with us, and had a very strong quarter again.

Okay. Last quarter you talked about a change in distribution from one of your tier two guys. I am just curious if that transition is largely complete and you have found another solution to get to some of the smaller U.S. carriers yet?

Okay. Let me clarify our collective thoughts around that. I think we were asked questions about potential change in distribution strategy with one of our customers. My comments were with the inventory reduction, I wouldn't be surprised that we don't know that they were doing that. I would characterize it the exact same today.

Okay. Thanks for that clarification. And then maybe one last question. From a balance sheet perspective, DSOs ticked up on a sequential basis. It looks like they're also up year-over-year pretty strongly here, December to December. If you look out over the last, I don't know, 5 or 6 six years, given the linearity of your business, DSOs tend to drop nicely in Q4. I'm just curious, is this - you know, you mentioned Total Access 5000 shipping late in the quarter, but the change in the balance sheet tempo is a little bit of a surprise. I am wondering if you can help us understand that?

Sure, Scott. Jim here. The largest driver there is really the change in geographic mix. Again, international revenue increased quite a bit, in large bit due to Fiber to the Node, and again that was the larger driver of the increase in DSOs.

All right, guys. Thanks a lot.

Sharise, one last question.

Okay. Your last question comes from Raimundo Archibald with Kaufman Brothers.

Good morning. Thank you. I just had a follow up question on the internetworking business. I think through the better part of this year, a lot of the traction had come from some of your tier one partners in terms of - as distributors, and I just was hoping to get an undate in terms of the productivity of some of the bar channel, bar partners that you have added in the last year or so. Where are we on that count, and should we look for some acceleration of momentum going into 2008 from those partners?

We are absolutely looking for acceleration of our bar partner base now, it is up I think on a year-over-year basis probably close to 50% or so. We are continuing to move forward with improvement of new bars. The internetworking and NetVanta sales into that base is growing, and I think it is a meaningful and a very important piece to what we are trying to do over the next few years.

Very good. Thank you.

Thank you everybody. We look forward to talking to you next quarter.

Thank you. This concludes today's ADTRAN fourth quarter 2007 earnings release call. Thank you for your participation. You may now disconnect.